How You Are Screwed

The following new reporting of how the "ordinary" person is being screwed. We suggest periodic information on THE SCREWING PROCESS. (An excellent beginners book to learn about the screwing process is: The Screwing of the Average Man, by Charles Hapgood. The top 15% need to screw the bottom 85% for the system to work.) Each of the following SCREWED you!- Enron, with related scandals. Accounting/banking/stock analysts screwing (Trillions lost) California Energy Crisis Off-shore tax shelters by wealthy and corporations. Mutual Funds scandal (small screwing of the average guy) Corporate overseas tax cuts ($135 Billion) Abusive tax shelters (IRA-related--CLICK HERE) FAILED PENSION PLANS (CLICK HERE--will scare the hell out of you) Even the Germans are doing it, shafting the workers on their pensions. We taxpayers fund the occupation of two Mideastern countries ($87 Billion) Medicare ????? Is this next on the list? Social Security ???? Or this? Pension Troubles = S.&L. Collapse? When the wealthy shelter their money, you are indirectly screwed. U.S. Insurer of Pensions Says Its Deficit Has Soared 'American Dynasty': Family Lies Red Ink Realities 'The Progress Paradox' and 'The Cheating Culture': Happiness Math 'Bull!' and 'Origins of the Crash': Executives Gone Wild Democratization of Debt (Your money rather than banks now make investment loans) Screwed by the IRS Screwed by Life Insurance Brokers and Companies Work earnings taxes more than twice investment earnings (you poor workers) Tax Relief Charade While the Politicians Fiddle, America Goes Broke Homeowners Come Up Short on Insurance Social Security Privatization. Worried about YOUR taxes? Will your retirement be screwed along with all that's above? The Apocalypse Now and the Brave New World, by Richard Moore The Untaxed Rich, Found and Then Lost Iraq and Oil The Secret Life of a Retirement Account By LYNNLEY BROWNING and DAVID CAY JOHNSTON, THE NEW YORK TIMES Published: November 11, 2003 In 1997, Congress gave retirement savers an attractive deal: put after-tax dollars into a Roth I.R.A. and withdraw all future investment gains and contributions without ever paying another penny of tax. For some people, that is apparently not enough. They have sought to put in money on which they have never paid taxes, vastly exceed the annual contribution limit of up to $3,500 and reap much greater wealth. The Internal Revenue Service, as part of a crackdown on abusive tax shelters, has been pressing an action against one of the country's biggest accounting firms, Grant Thornton, to force it to disclose the names of clients it advised to shelter millions of taxable dollars in Roth I.R.A.'s via shell corporations. How such a shelter worked and how it was promoted is vividly detailed in a lawsuit brought by a former Silicon Valley executive against Grant Thornton over the shelter he was sold. The lawsuit - and the stepped-up activity by the I.R.S. - are indicative of how tax shelters are no longer only for huge corporations and the superrich. Financial arrangements that might have once been structured to shelter tens and hundreds of millions of dollars in taxes are now being used for the mere millions of the simply wealthy, like those who enjoyed windfalls on salaries, stock and options during the Silicon Valley technology boom of the late 1990's. Such a democratization of the use of tax shelters threatens to strain the resources of tax enforcers and add to the burden of taxpayers. Grant Thornton declined to comment on the lawsuit or on the tax shelters. But according to documents filed with the lawsuit, Grant Thornton called its corporation-owned Roth I.R.A. shelter strategy GIFT, or Generating Income Free of Tax, and promoted the shelter in marketing brochures marked "confidential." One brochure, full of descriptive arrows, described the shelter this way: Set up a shell company and a Roth I.R.A., then make the Roth I.R.A. the effective owner of the new company by transferring shares of and tax-free dividends from the shell company to the Roth I.R.A. Next, have the shell company pay tax-free dividends, of any amount and from apparently any source, into the I.R.A. One benefit of GIFT, according to the brochure: "savings for higher education." One shelter client was William C. Ross, a software sales manager. Mr. Ross filed a lawsuit against Grant Thornton and a smaller accounting firm, Raymond Creal, in June 2002 in a California state court, saying the two firms sold him a bogus Roth I.R.A. shelter that violated federal and state tax laws, committed accounting malpractice and breached their fiduciary duties. According to his lawsuit, Mr. Ross first learned of Grant Thornton's shelter in the months after November 1999, when Red Hat Inc., a software company based in Raleigh, N.C., acquired Cygnus Solutions, a competitor in Sunnyvale, Calif., where Mr. Ross was then a vice president. Mr. Ross received approximately 35,000 Red Hat shares and options as part of the acquisition, and wanted to sell his stock quickly, his complaint says. In early January 2000, a friend referred Mr. Ross to Robert Mather, an accountant at Raymond Creal in Fountain Valley, Calif. Mr. Mather put him in touch with A. Blair Stover, a senior tax manager at Grant Thornton in Kansas City, Mo. The two men told Mr. Ross that he could sell his Red Hat - and any other - stock tax-free by setting up a small investment company in Nevada, where there is no income tax, and a Roth I.R.A. that would buy the investment company. Stock sales are usually taxed at capital gains rates, while options given to employees are usually taxed at the same rate as wages. By Jan. 26, 2000, Grant Thornton had established Mr. Ross's Nevada-based shell company, the Ticor Acquisition and Investment Company, and his Roth I.R.A. Mr. Ross contributed $2,000 in cash to the Roth I.R.A., then the legal yearly limit. He then transferred all his Red Hat shares, at one point worth millions of dollars, to the shell Nevada company, according to court papers. The total cost for the shelter for Mr. Ross was $135,000. The fee, Grant Thornton said, was tax-deductible. I.R.S. regulations prohibit self-dealing with Roth I.R.A. plans. Grant Thornton, in an unsigned letter to Mr. Ross dated Jan. 26, 2000, while not explicitly declaring the shelter legal, said that "the proposed structure does not violate the self-dealing rules.'' Among other things, the letter cited a 1996 ruling, Swanson v. Commissioner, which led the I.R.S. that year to drop its challenge to a transaction in which a taxpayer's I.R.A. became the shareholder of a newly formed shell corporation that exported goods for the taxpayer's operating corporation. That complex ruling was made a year before Roth I.R.A.'s were signed into law, and involved, among other things, foreign tax issues apparently not present in the Grant Thornton shelter, said Edward A. Slott, an accountant in Rockville Centre, N.Y., and publisher of Ed Slott's I.R.A. Advisor, a newsletter. "I don't care which way you dice it, you cannot self-deal in a Roth I.R.A., and that's what's going on here,'' Mr. Slott said. The Grant Thornton shelter, he said, is the kind of arrangement "where you send up all the smoke screens to make it look like you're not doing what you're really doing." An I.R.S. representative did not return a request yesterday for comment. In its summons to Grant Thornton, served on Oct. 10, the I.R.S. wrote that it "is concerned that Grant Thornton has structured the Roth-I.R.A. owned corporation strategy to enable individual taxpayers to violate the limitations on annual contributions allowed to Roth I.R.A.'s, and to avoid taxation on corporate dividends." In a Jan. 24, 2000, letter to Mr. Stover of Grant Thornton, Mr. Ross wrote that he would pay any taxes and interest, but not fines or penalties, should the I.R.S. successfully challenge the validity of the plan, as the agency now appears to be doing. Until then, wrote Mr. Ross, transferring the Red Hat shares to the Nevada shell company "will have no tax implications whatsoever to me," while subsequent sale of the stock "will be a nontaxable event." For the sale, Mr. Mather of the Raymond Creal accounting firm referred Mr. Ross to James Audley of Rochdale Investment Management, a New York-based firm with an office in San Francisco, to sell his Red Hat stock. Rochdale is a privately held investment counseling firm, with a brokerage unit, and could "more advantageously sell the stock in the Roth I.R.A., and could manage the money once the stock was sold," according to the complaint. Rochdale officials did not return calls for comment. On Feb. 15, 2000, Mr. Audley sold 20,000 of Mr. Ross's Red Hat shares for approximately $1.5 million, according to the complaint, and placed the proceeds in his Roth I.R.A. According to court papers, Mr. Ross had not spent the proceeds as of June 10, 2002, according to court papers. Under federal law, taxpayers must be 591/2 and have held their Roth I.R.A. for at least five years to make tax-free withdrawals. Mr. Ross, whose age is not known, did not return repeated calls to his home requesting comment. His lawyer, John W. Clark, of Palo Alto, Calif., provided a copy of the complaint but declined to comment. The I.R.S. is already investigating Grant Thornton and other accounting firms, including KPMG, over a number of other tax shelters. The I.R.S. commissioner, Mark W. Everson, vowed last month to clamp down on promoters and users of abusive tax shelters at all levels, and the Senate Finance Committee held hearings on corporate shelters.   Failed Pensions: A Painful Lesson in Assumptions By MARY WILLIAMS WALSH, THE NEW YORK TIMES Published: November 12, 2003 Robert M. Bowden retired from his job as accounts manager for a large trucking company with a plan to travel for himself. But his company's pension plan collapsed this year, and his annual payout was cut to $24,000 from $48,000. Mr. Bowden and other retirees of the company, CNF, see a culprit. In a lawsuit, they accuse the company of failing for many years to set aside enough money in the plan. The company did this, they say, by assuming they would retire much later than they really did. Though the CNF plan offered full benefits to people as young as 55, the company projected people would stick to their desks until they turned 64. A look at documents made public in the retirees' fight at CNF and at a few other companies, including US Airways and Bethlehem Steel, shows that companies have great leeway to tweak certain crucial assumptions about the future — when their workers will retire, how long they will live, and which way interest rates will move, among others. A year shaved off an estimate here, a decimal point's difference there can significantly reduce a company's pension obligations on paper. The company can save millions of dollars in pension contributions. But if a company shortchanges its pension fund year after year and the company then gets into trouble, the plan that looked healthy can fail, seemingly out of nowhere, leaving workers stranded. "I'm in a financial survival mode," Mr. Bowden said. At 59, he recently refinanced his mortgage in Lake Oswego, Ore., to conserve cash while looking for a cheaper place to live. Assumptions that the government considers inadequate contributed to the demise of almost all of the roughly 150 pension plans that failed in the last year. Current detailed information about pension plans is not routinely disclosed, however. The painful lesson for employees comes as companies press Congress for permanent relaxation of some provisions of the pension funding law. One measure, passed by the House in October, would allow companies to make more favorable interest rate assumptions for the next two years while a panel works on broad changes to the pension funding rules. Two other bills, recently passed by different Senate committees, would extend the interest-rate change beyond two years, and one of them would also suspend a measure intended to punish companies that let their pension plans become severely underfunded. If Congress does not act before a stopgap measure expires at the end of the year, companies will be forced to make large mandatory contributions. Companies generally contend that the funding requirements are out of step with the current financial environment. CNF has not filed a response to the retirees' suit, and a spokeswoman said the company could not comment on the dispute. According to a rule of thumb used by actuaries, though, every year's difference between the company's projection and the age at which the employees actually retired might have understated benefits by about $15 million. "There are ways companies can kind of game the system, to contribute a lot less money than is realistic," said Jeremy I. Bulow, the Richard Stepp professor of economics at Stanford University's graduate school of business. Essentially, he said, they are trying to get a loan from the government agency that insures pensions, the Pension Benefit Guaranty Corporation, or from their employees. "That's what they're trying to do, and it's very bad news," he said. To be sure, the world of actuarial science is not the wild, wild West. Companies have been caught gaming pension assumptions in the past and as a result some assumptions are now regulated. Interest rate assumptions are especially powerful in pension calculations, and the most important ones are today a matter of statute — the same statute Congress is now being asked to modify. Assumptions about employee life spans are also regulated today, after General Motors was found in 1994 to be assuming its workers would die younger than Ford's. Workers who die young will have collected smaller total pensions, reducing the corporate contributions. Today, all companies are supposed to use a standard mortality table, though some companies are lobbying Congress for more leeway there as well. For other assumptions — about pay increases, staff turnover, marital status, retirement ages and other factors — there are no hard and fast rules. The law says only that assumptions must be reasonable; that term can mean different things to different people. US Airways and AMR's American Airlines, for instance, have found it reasonable in recent years to assume that their pilots will retire when they turn 60, because the Federal Aviation Administration grounds commercial pilots when they reach that age. "Pilots enjoy flying and typically it's an avocation in addition to being a job," an American Airlines spokesman said. "A lot of pilots would even work past 60 if they could." After US Airways' pension plan for its pilots failed this year, however, the government looked at the age when they were actually retiring and found that lately, more than half have been retiring well before their 60th birthday. The Pension Benefit Guaranty Corporation is arguing in bankruptcy court that the airline should have assumed that the pilots would retire, on average, at 56. The agency, an unsecured creditor, is in court seeking a portion of the reorganized airline's stock to help cover its cost of paying the pilots' benefits. Because the government insures pensions only up to certain limits, the US Airways pilots will lose, in total, about $1.6 billion in anticipated benefits, according to the pension agency. Documents in the US Airways case also show how powerfully a pension plan can be affected by an assumption that seems only slightly off the mark. An analysis supplied by US Airways' actuary, Towers Perrin, suggests that when the airline assumed its pilots would retire four years later than they really did, it shrank the amount it appeared to owe them by about $385 million. That, in turn, meant it contributed less to the plan. "In every dimension that was possible, they made the most aggressive actuarial assumptions they could," Mr. Bulow said in an interview. He submitted testimony on behalf of the government in the US Airways case. Towers Perrin declined to comment on its retirement-age assumptions, citing its policy not to discuss matters before the courts. US Airways, in court documents, stands by its assumption that pilots will retire at 60 in the future. It notes that the defunct pension plan has been replaced by a new benefits package that will reward pilots who keep working as long as possible. The airline also argues that the government is forcing it to make an inappropriate assumption about interest rates in its calculations, in an effort to grab a larger portion of its stock. The judge is expected to resolve the dispute in the coming weeks. The retirement age was also a factor in the costly demise of Bethlehem Steel's pension plan. Bethlehem's actuary, Aon Consulting, assumed the work force would retire at age 62, even though the company offered pensions to much younger workers, as long as they had 30 years of service. Other actuaries said that assumption was highly questionable, and that it was an important factor in the Bethlehem plan's record $3.7 billion shortfall when it failed. A spokesman for Aon said the firm could not comment on a client's affairs. Bethlehem itself has been liquidated. The government estimates that Bethlehem's work force has lost, over all, about $400 million in promised benefits. At CNF, the pension troubles grew out of the freight company's decision, in 1996, to spin off its unprofitable Consolidated Freightways unit. Consolidated, a unionized long-haul trucking business, was losing money in the mid-1990's, dragging down the parent company's performance. CNF was meanwhile building up a separate nonunion trucking business that was profitable. By 1996 the two divisions were competing head to head in some markets. When it spun off Consolidated, CNF had to split its pension fund and put some of the money into a new fund for the departing work force. Such transactions are regulated; companies must certify to the Internal Revenue Service that they are transferring enough money to cover the benefits the departing workers have earned. Mr. Bowden and his fellow retirees said that when CNF calculated their benefits, it assumed that most of them would retire at 64. But many Consolidated managers retired in their late 50's, they say, to take advantage of generous early retirement benefits the company offered to people whose age, plus years of service, added up to 85. Steven M. Tindall, the retirees' lawyer, said that by using a higher retirement age in its calculations, CNF was able to put less money into the spun-off pension plan. "We think this is a way the company saved some money," said Mr. Tindall, a partner in the law firm of Lieff, Cabraser, Heimann & Bernstein in San Francisco. He and the retirees also said that CNF used an inflated interest rate in its calculations, further reducing the amount it put into their pension fund. Born weak, the new pension fund was then underfed each year, they believe, because CNF continued to administer it using inappropriate assumptions. Consolidated's retired managers, like Mr. Bowden, said they had no idea this was happening until it was too late. They said they were never even told the pension fund had been separated from CNF, much less that it was withering away. Chester Madison, a group operations manager for Consolidated, said that just before he retired, in August 2002, he asked about the pension plan and was told it was "fully funded." Two weeks later, Consolidated filed for bankruptcy. Four months after that, he and the others began receiving letters saying the plan had failed. It had less than half the assets needed to pay their benefits. "You feel betrayed," said Mr. Madison, whose monthly pension check has been reduced to about $1,700 from $4,100. He has been looking for a job to make up the difference. "Not too many people are going to hire you when you're 58 years old," he said. Even Consolidated's retired president, Thomas A. Paulsen, was surprised. At age 59, with 36 years of service, he had earned a pension of $9,755 a month. When the plan failed, his check was reduced to $1,876. He believes CNF spun off Consolidated with insufficient resources, to "send the old dog out to die." Employees at all levels are supposed to get basic information about their pension plans once a year, but it is difficult, if not impossible, to check the validity of the underlying assumptions. Companies are not required to disclose current, detailed information about their pension plans. They do list three actuarial assumptions in the footnotes of their annual reports, but retirement age is not among them. More details about pension plans are on file at the Labor Department, but those records are generally at least two years out of date. And even if an employee goes to the trouble of getting the numbers, they are difficult to decode without a complete understanding of the company's demographics. Mr. Bowden recalled that CNF hired him in 1967, when the company was expanding rapidly and hiring lots of baby boomers. They were entitled to early retirement, and the plan failed just as they were claiming it. The government's pension insurance has limits to begin with, but those limits are reduced even more for those who retire before age 65. "There's hundreds of thousands, maybe millions, of people, who believe that the P.B.G.C. will guarantee their pensions, and it's not the case at all," said Robert Newell, a retired Consolidated vice president. His monthly pension has been reduced to $2,025 from $5,357.   December 7, 2003 COUNTING DOWN Pension Troubles = S.&L. Collapse? Some Say Bank on It By MARY WILLIAMS WALSH In 1985, a financial consultant named Alan Greenspan was hired to write an opinion letter on behalf of a fast-growing California savings and loan association. The future Fed chairman praised the institution's managers for building it up "to a vibrant and healthy state, with a strong net worth position." As it turned out, the institution, Lincoln Savings and Loan, was taken over by the government in 1989 at a cost to taxpayers of about $3.4 billion. The collapse of the savings and loan industry in the late 1980's is being evoked more and more to describe the possible dangers ahead for ailing pension funds. If even the sharp-eyed Alan Greenspan can fail to spot an S.&L. crisis in the making, what can be said about the way Washington is handling the $1.6 trillion in retirement money? Many business executives say the similarities are exaggerated. But a group of academics and a few officials are paying heed as they seek the best way to secure the pensions of some 44 million Americans. A hearing of the Senate Committee on Aging in October dealt specifically with the comparisons. The Treasury Secretary, John W. Snow, has mused publicly about whether history is repeating itself. "When you think about pensions, we've got a brewing problem here that has some — I don't want to overstate here — but has some analogy to the savings and loan crisis of some years back," he told The Wall Street Journal last summer. "You've got a lot of accounting rules; you've got a mismatch of liabilities and assets; and you've got moral hazard." The key in the 1980's, say experts who are making the comparison, was an overriding impulse to overlook warning signs — to assume that a sick industry will get better if only given time and a little regulatory relief. The S.&L. system didn't melt down until 1989, but its troubles started more than a decade earlier. Years of inaction in between made the eventual bailout worse. Now it is pension funds that are showing signs of trouble. The law requires that companies set aside enough money to pay the pensions they promise, but at the moment there doesn't seem to be enough. If employers were forced to pay every penny, right now, their funds would be more than $350 billion short. That doesn't mean a $350 billion bailout — or any bailout — is looming. But the numbers suggest that if the pension system melted down, taxpayers could be on the hook for tens or hundreds of billions of dollars. Companies say the danger is all but nonexistent. Pension funds, after all, do not work like banks and are not generally susceptible to runs. They typically pay out benefits over many decades, not one day to the next. The glacial pace of the pension world, companies say, means today's shortfalls will be recoverable in years to come. But those who see parallels argue that the population is aging, and warn that companies — especially those with older workers — risk running out of time to cover their shortfalls. To these analysts, the slow pace at which pensions are paid serves only to obscure the risk. Now, many companies are running into a law requiring employers with big pension deficits to speed up their contributions sharply. These payments can be huge, and executives aren't eager to pony up. Why, they ask, demand strict compliance with the rules when the pension sector has just survived an excruciating downturn, the economy is strengthening and pension plans seem poised to recover on their own? Rather than cracking down, they say, the government should ease the rules. Both the House and the Senate this week are to finish work on a pension-relief bill. One measure would give companies a two- or three-year break on the special, accelerated contributions. Another would let companies use a new method to calculate the pensions they owe — a method that would make the total amounts look smaller, reducing the amount companies must set aside today. This approach takes economists like Zvi Bodie back to the early 1980's, when the savings and loan associations had alarming shortfalls, and Congress eased the rules. "It's so striking, the similarity," said Professor Bodie, a Boston University professor of finance and economics who has written of the lessons of the S.&L. crisis for the pension system. Hundreds of savings and loans became insolvent after interest rates rose sharply in the late 1970's. The government closed some of the sickest ones, using the S.&L. insurance program to compensate depositors. But the closures were costly and politically unpopular, recalled George J. Benston, an Emory University economics and finance professor. They added to the federal deficit, he said, and angered the U.S. League of Savings Associations, which ratcheted up its political contributions and lobbying. As a result, hundreds of stumbling savings and loans were allowed to stay open, and even encouraged to grow, Professor Benston said. Regulators lowered their capital requirements, and let them puff up what little capital they had with accounting gimmicks. Meanwhile, Congress granted them the freedom to get into new lines of business. They ventured into new. speculative deals: real estate, venture capital, even junk bonds. Today, said Professor Bodie, it is pension funds that are making unorthodox investments, trying to recoup stock-market losses by adding hedge funds, private equity and other risky vehicles to their portfolios. For the savings and loans, the strategy backfired when their investments soured. And because the Savings and loans had been encouraged to expand before they failed, their losses were much bigger than if the regulators had simply closed them in the first place. Analysts now estimate the total cost at $150 billion to $200 billion. The presence of federal deposit insurance prolonged the crisis, economists say. Depositors stayed cheerfully put, knowing the government would make them whole if an S.&L. failed. Today, the existence of government pension insurance may be encouraging risky behavior by companies and their pension managers, said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "Heads they've won, tails the government loses," she said. The agency that insures pensions, the Pension Benefit Guaranty Corporation, is now technically insolvent, having taken over a number of large bankrupt pension plans in recent years. It owes retirees more, over time, than it has the money to pay. Unlike the S.&L. guarantor, it has many years to make all the payments it owes. But at some point, it will have to tap new resources. No one can say when — or which resources. Congress has the power to raise the premiums that the agency charges companies. But so far Congress has shown no interest in doing so. This may turn out to be another echo of the past, Professor Benston said. The hopelessness of the S.&L. situation was clear by 1988, he said, but Congress staved off any announcement of the taxpayer bailout until 1989. By then, the presidential election was over.   PERSONAL NOTE: In the 70's while in graduate school at Fordham University I read The Rich and the Super Rich, by Ferdinand Lundberg - what an eye opener! Now comes another "revolutionary" book, an update on HOW the super rich actually accomplish their goals. I challenge your to read Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich — And Cheat Everybody Else, by David Cay Johnston. This is a very RADICAL (getting to the roots of the problem) book! A MUST READ! ENCOUNTER The Loophole Artist By DAVID CAY JOHNSTON Published: December 21, 2003 Few Americans have heard of Jonathan Blattmachr, a partner at Milbank, Tweed, Hadley & McCloy. But among the 16,000 or so lawyers in America who specialize in trusts and estates, which is to say in the passing of wealth from one generation to the next, he enjoys the status of a Hollywood star. In these circles, his first name alone prompts recognition. Men (and a few women) of great wealth confide in Blattmachr. The Rockefellers are among those who seek his counsel. Because his specialty is maintaining wealth across time, he needs to know more than just the size and shape of his clients' fortunes. His work requires knowing whether a marriage is an enduring bond of love or a commercial relationship, or whether heirs can be trusted with fortunes or only allowed a stream of income. He knows of prodigal sons and promising granddaughters, of executives at family-owned businesses who will not learn for years that the brass ring was never going to be theirs. Sometimes men of great wealth whisper secrets they would never share with their wives. He knows how much a mistress costs or whether, if health fails, a spouse can be trusted with the power to pull the plug. His clients reveal these things to Blattmachr because he can help them maintain their wealth now and for their children. He can chart clandestine routes through the maze of the tax code, making a man who appears as a Midas to his bankers look like a pauper to the tax man. Blattmachr helps the superrich keep their riches -- at the expense of everyone else. Sometimes the price is paid in higher taxes. More often it's paid in cuts in services or by borrowing from the next generation of taxpayers. He's not ashamed of this. His methods are perfectly legal. In fact, he sees himself not as someone who exploits the system for the benefit of the few but as the guy who keeps the system honest for everyone. For his job to have meaning -- and to score intellectually, which is his main source of satisfaction -- the tax system has to have integrity. It can't be corrupt or too easily foiled. Just as there is no honor in getting a criminal acquitted when the judge can be bought, there is no honor in finding a tax loophole when the code yields too easily to manipulation. His cat-and-mouse game is to work the loopholes in the system until the government finds them and draws them closed. And when he sees something in the code he considers egregious, he speaks up, as he did when he objected to the repeal of the estate tax. The repeal would ''shift the tax burden from the wealthy to everyone else,'' Blattmachr said one morning in one of his two offices, this one a sunny Park Avenue aerie from which he can look down on the great wealth machine that is Manhattan. Given that shifting the tax burden one wealthy person at a time is Blattmachr's full-time occupation, a cynic might think that his opposition to the estate-tax repeal was just self-interest. But Blattmachr will have plenty of work, estate tax or not. There are always trusts to be designed and capital gains taxes to be cleverly avoided. The superrich will always be looking for ways to shelter their money. Blattmachr's objection to the repeal -- which, in the end, was restricted to just one year, 2010 -- is more complicated. It reflects his capacity to push and pull the rules to his clients' advantage, while still yearning for an ideal, principled law. Blattmachr's practice exists because America has two tax systems, separate and unequal. One is for wage earners, and most of us know firsthand that that system works effectively. The other is for the wealthy, who control much of what the I.R.S. knows about their finances and who in recent years have paid a shrinking share of their incomes to sustain the civilization that makes their riches possible. Few of us also know that this means that the 400 Americans who reported the biggest incomes in 2000 paid just 22.3 cents out of each dollar in federal income taxes. That is about the rate paid by a single person making $125,000. Wealth is more concentrated in America than at any time since 1929. Tax specialists like Blattmachr have done their part, but the tax code itself -- written and approved by Congress -- also stacks the deck. Consider just a few examples. Hidden in a 1985 law was a subsidy for cushy executive transportation. Senior executives aren't charged for personal trips on company jets, but they must pay income tax on the value of the flight, which is counted as income, just like salary and bonus. The value of the flight, however, is not based on actual costs but on a formula required by Congress, one that discounts the value so deeply that it makes personal use of a company jet more attractive than any other form of pay. It allows a C.E.O. to travel in a corporate jet coast to coast for $260. But the company gets to take a tax deduction on the jet, thus removing funds from the federal treasury. The cost to taxpayers for that coast-to-coast flight is thus at least $3,500. Or consider how billions of dollars in investment partnership profits go untaxed every year because neither Congress nor the I.R.S. requires the partnerships to answer one simple question: does this partnership have a domestic tax-exempt partner? If that question were asked, and the answers recorded, the I.R.S. could easily track down a commonly used tax dodge. It would take about $100,000 a year to make the change to the partnership tax form and enter the data in I.R.S. computers. The potential recovery in tax dollars would be in the tens of billions annually. But neither Congress nor the I.R.S. has allocated the money to change the question. Blattmachr's genius is in seeing the whole and these holes in the whole. He then sells this genius to his clients. One of his early insights was that it is entirely and legally possible for the superrich to reap unlimited stock profits without paying a cent of capital gains tax. The rich can do this by manipulating charitable trusts. These trusts are a common enough device used by generous people who own an asset, usually stock, that has appreciated in value. Instead of selling the stock, paying capital gains taxes, and then investing the after-tax proceeds, a person can instead donate the stock to a charitable trust that he controls. The trust can sell the assets tax-free and invest the untaxed proceeds. The income from that investment -- typically 6 percent annually -- is paid to the donor for life. When the donor dies, what remains in the trust goes to charity. Blattmachr took this clever gimmick and supersized it. He figured out a way to turn that nice little 6 percent annual income stream into a torrent -- 80 percent returns a year for two years. So on stock gains of $100 million, the owners would get back at least $96 million, as opposed to the mere $72 million they would have gotten if they had sold the stock outright and paid capital gains taxes. Then the trust would fold, and some charity would get the remaining $4 million. The government would get less than nothing since the gift to the charitable trust would create an income tax deduction. The technique was so aggressive that when other tax lawyers got their hands on the plan, one of them sent it to the Treasury Department in a plain brown envelope. Treasury responded by instituting new rules, blocking the way to the treasure. But Blattmachr quickly charted another route through those rules, drawing up a new map that allowed billions more dollars to escape capital gains taxes -- until the government blocked it, too. Blattmachr's treasure maps do more than just lighten the burden of taxes for his clients. Often his strategies allow money to pass without showing up anywhere in the official income statistics. Were these and similar transactions counted, then the incomes of the rich would appear to be much larger -- and the share of their incomes going to taxes much smaller. Blattmachr is a master at exploiting the opportunities. Always adept with numbers -- growing up he dreamed of becoming a mathematics professor -- Blattmachr distinguished himself at Columbia University law school with his easy grasp of complex theoretical concepts. ''Many lawyers . . . are often bewildered when trying to foresee what the full impact of implementing certain actions will be,'' Blattmachr once wrote. ''I have found that those who have studied mathematics can approach and master both the legal principles and their effect in a way which most others cannot.'' At Columbia in the late 60's, he set about studying Soviet law, certain he would find that it was unprincipled, written to advance the interests of the ruling elite. But he discovered his thesis was wrong. He concluded that ''on paper, Soviet law was very well drafted, grounded in sound principles.'' It was, he came to realize, the administration of Soviet law that was monstrous. He was fascinated to find that the U.S. tax code was something like the Soviet's opposite: an intensely political law that favors the ruling elite but is administered objectively. Its secrets and intricacies have fascinated him ever since, says Mitchell Gans, a Hofstra University law professor and Blattmachr's good friend. ''It's Saturday morning, and Jonathan and I have been reading, separately, the latest I.R.S. notice,'' Gans says. ''The phone rings, and Jonathan will say: 'Did you read that? It doesn't make sense. Why is this rule this way and that rule that way? What could they have meant by this?' And pretty soon, two hours have gone by.'' Blattmachr is always on the hunt, and Congress often makes his job easier. In 1997, Congress passed what its sponsors promoted as a tax cut for the middle class and especially for families with children. Buried in that law were many tax breaks for the rich, some subtle and some huge, notably a sharp reduction in the tax rate on long-term capital gains, the source of more than two-thirds of the incomes of the 400 richest Americans. But some loopholes are too big, even for his liking. He was the first to expose one such opportunity buried in the first tax-cut bill sponsored by President Bush. The loophole -- invisible to all but a very few whose brains could conceive the pick-up-sticks consequences of the proposed law changes -- would have allowed the very rich to avoid paying capital gains taxes at all and would have cost everyone else dearly. Thanks in large part to Blattmachr's sounding the alarm, the Senate did not change that part of the law. Blattmachr also has warned that proposals now in Congress to repeal, rather than reform, the alternative minimum tax would further shift the pile of pick-up sticks to the superrich. ''There are lots of things you would not even think about because of the alternative minimum tax,'' Blattmachr said in his Park Avenue office. ''But if you repeal it, then there are all sorts of things to start thinking about.'' And with that he began musing aloud about manipulating the rules on municipal bond interest, some of which can become taxable under the alternative tax. He is just one of thousands of lawyers and tax engineers who, with the alternative tax repealed, would put their minds to work helping the rich pay less. Since there is no free lunch and since the bill for government has to be paid, that means Blattmachr's clients simply leave part of their bill on your table. David Cay Johnston, who won a 2001 Pulitzer Prize for beat reporting, is a financial reporter for The New York Times. This article is adapted from his book ''Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich — And Cheat Everybody Else,'' which will be published next month by Portfolio. NEW YORK TIMES - NEWS ANALYSIS In Germany, Shifting the Cost of the Pension to the Worker By FLOYD NORRIS Published: January 9, 2004 ARIS, Jan. 8 - German business and government are in agreement over one thing: Both are worried about paying the pension bills for Germany's aging work force. The result may be bad news for workers, and more pressure on them to save for their own retirement. Three major German companies disclosed plans this week to cut pension benefits for workers, with one, Commerzbank, doing so without first consulting its workers - a move that is highly unusual in Germany. Advertisement "The problem for companies is whether they can afford the pensions in the future," said Christoph Groffy, a spokesman for Gerling, a German insurance company that is recovering from problems in its reinsurance business. He said workers at Gerling agreed last month to a change that would reduce pension benefits for most of them. That will lead to some higher-paid workers seeing cuts of up to 50 percent in their company-paid pensions. The Gerling move, and plans for a change by Schering, the pharmaceutical company, were disclosed Wednesday, a day after Commerzbank, the large German bank, announced plans to simply halt its pension plan in 2005. Workers hired after that date will receive no pension from the company. Workers now with the company will receive benefits already earned but will not accrue additional benefits. Last month, the German government enacted its Agenda 2010 economic package that made modest changes in the state pension plan, which is similar in concept to the Social Security system in the United States. The government indicated that further money-saving measures would be considered. Officials made clear that they hoped German workers would take more responsibility for their own retirement, either directly or through company plans. "They wanted to address the point that personal responsibility of the people must increase," said Robert Ungnad, a spokesman for Schering, which said it planned to offer a less-generous retirement plan for workers hired this year or after. "So they want to push personal pension schemes, and they would like to see more company schemes. But it does not always work out that way, as you can see from Commerzbank." While most large German companies have not indicated any plans to change pension benefits, and both Commerzbank and Gerling have faced financial difficulties, the fact that any companies are moving in that direction could stiffen union resistance to efforts to cut the state pension plan. That plan is financed on a pay-as-you-go basis from payroll taxes, and remains in effect. The economic package announced last month altered the benefit payment schedule slightly but did not make major changes. At Schering, Mr. Ungnad said details of the new pension plan would be set after discussions with workers. But he said the new plan would change the way benefits were calculated; now they are based on how much a worker makes in the final five years before reaching the age of 60. The new plan, he said, would base benefits on contributions made over a worker's career. That would end the risk to the company that an employee would get big raises late in a career and thereby qualify for more pension benefits. He said that while the current pension plan was financed entirely by company contributions, no decision had been made whether the new one might have some worker contributions. The current Schering plan will continue for the existing 8,000 employees in Germany. At Gerling, the company adopted a less-generous pension plan in 1998, but exempted workers already employed. Currently, Mr. Groffy said, 2,500 of the company's 7,500 workers are subject to the 1998 plan and would not be affected by its current change, which will move the other workers into the 1998 plan. "The other 5,000 will suffer a reduction in the pension, in many cases of up to 30 percent to 50 percent," he said. The new plan has a ceiling on benefits, so the largest impact will be on the more highly paid workers. He said that workers now over 60 would not be affected, and that the effect would be small on those nearing that age. "Those in their 40's and early 50's will suffer the most," he said. The Commerzbank move means that employees will no longer accumulate any pension benefits other than those under the government plan, and it aroused anger among worker representatives, who said they had not been consulted. "We doubt that the board's decision is legal, and experts are investigating before discussion at an extraordinary meeting of the workers' council on Jan. 22," said Uwe Foullong of the Verdi Union, according to Reuters. Commerzbank shares rose on Tuesday, but then gave back those gains on Wednesday; the shares closed Thursday at 15.92 euros ($20.13) a share, off 0.4 percent for the week to date.   NEW YORK TIMES, Business U.S. Insurer of Pensions Says Its Deficit Has Soared By MARY WILLIAMS WALSH Published: January 16, 2004 The federal agency that insures pension plans said yesterday that its deficit had grown from $3.6 billion to $11.2 billion in just a year and that it would try to deal with the escalating problem by overhauling its own investments, among other measures. The agency, the Pension Benefit Guaranty Corporation, said that two consecutive years of record failures by corporate pension plans and continuing adverse market conditions left it with a shortfall much greater than a year earlier, which had been the previous low point in the agency's 30-year history. People briefed on the new investment plan say the agency intends to reduce its risk in the stock market by investing in assets - including bonds and stock-like instruments - that will mature when it must make payments to retirees. Steven A. Kandarian, the executive director who will soon leave the agency, said that the board had recently voted to change the investment policy but declined to provide details. Some consultants said the new investment plan could be a model for companies that sponsor pension plans. They have argued that the pension funds of at least some companies are dangerously invested in stocks and may be unable to fulfill their promises to retirees, leaving the government to make good on them. Zvi Bodie, a finance professor at Boston University, said reducing stock market risk was a long overdue improvement at the agency. "This is like saying, 'Yes, we understand the lessons of the S.& L. crisis,' " said Mr. Bodie, who has been writing about the agency's weaknesses for a number of years and has compared its troubles to the savings and loan disaster of the 1980's. Stock performance can be unpredictable, and pension payouts are predictable, creating a mismatch, he said. The new investment policy is a "recognition that stocks are not a hedge against long-term fixed liabilities,'' Mr. Bodie said. Detailed information about individual plans is not disclosed by companies, but pension specialists say that about two-thirds of their assets are typically invested in stocks. This practice allows companies to post larger investment gains when the stock market is moving up, and accounting rules allow those gains to bolster the corporate bottom line. Companies have so far resisted the argument that stocks are inappropriate investments for pension funds. But the recent bear market demonstrated that when stock prices fall, companies may be caught without enough money on hand to pay the pensions they owe. Such shortfalls become critical when the company sponsoring the plan is itself in trouble and cannot generate enough cash to replenish the pension fund. At a briefing for journalists yesterday, Mr. Kandarian noted that the agency was less concerned about the strong, growing companies with underfunded pension plans than with companies whose pension funds are in bad shape and are unstable themselves. In recent months, administration officials have discussed ways of giving incentives to companies to operate their pension funds with less risk. "Should all companies be treated the same?" Mr. Kandarian asked. "One thing we've looked at very closely in the administration is whether the system should be more risk-based." He suggested that rewarding companies that handled their pension plans prudently would create a more equitable system. As things now stand, he said, companies that keep their pension plans healthy are, with their insurance premiums, subsidizing companies that cannot or will not. "We're taking companies' money that are funding their plans, and using it to cover the companies that are saying, 'Let me borrow from my pension plan, effectively, to see if I can get out of my business problem,' " he said. At the moment, most of the risk is in the plans of airlines and steel companies. "But we shouldn't focus simply on the issues of airlines and steel," he said. "A strong industry could become a weak industry 10 years from now. We're thinking of this as a long-term issue." People briefed on the agency's new investment policy said officials had determined that since companies have large portions of their pension funds invested in stocks, then the agency is, in effect, facing a double risk. The agency's own stock investments could lose money - and the companies whose pensions it insures could also lose money on the stocks in their pension funds. "You kind of lose twice," said one person briefed on the new investment policy. "If you were a property-and-casualty insurer insuring a beachfront neighborhood, would you also buy property in that neighborhood?" The agency had 37 percent of its nearly $35 billion in total assets in stocks at the end of its last fiscal year, ended Sept. 30. The agency reported that it earned $3.3 billion on its investments last year, or a return of about 10.3 percent. That was more than enough to cover the agency's $2.5 billion in payments to retirees last year. But the payments to retirees are expected to grow in the coming years, and stock market gains cannot be counted on to cover these required cash outlays every year. By changing its investment approach, the agency will give up the chance of earning the high returns stocks can provide. Instead, it will earn smaller, but far more predictable, returns that can be calibrated to cover its obligations. About half of the agency's total investment portfolio comes from the companies that default on their pension obligations. When that happens, the agency takes over the assets that are left in the pension fund, and puts that money toward paying the pensions owed to the company's retirees. These assets are combined with those taken from other failed pension plans. Currently, the government invests this money primarily in the stocks of established companies. The agency has a separate investment portfolio solely in fixed-income securities; this is the money the agency receives as premiums from the companies that sponsor pension plans. The investment requirements of this fund are set by statute and cannot be changed by the agency or its board, which is composed of the secretaries of the Treasury, Labor and Commerce Departments. In addition to disclosing a record deficit yesterday, the agency said the weakness that has afflicted corporate pension funds for the last two years has spread to America's union-led pension plans, which have not been a problem for the government until now. The government said most of the risk posed by union-led pension plans is concentrated in two sectors, trucking and construction. Three of the 10 union plans showing the biggest deficits at the end of 2002 were run by the International Brotherhood of Teamsters, according to government data released yesterday. The government said no more-recent data on the Teamster plans were available. Mr. Kandarian said the agency's deteriorating financial condition "underscores the need for comprehensive reforms" of the pension law. The Bush administration has been calling for major changes in the pension laws and regulations for much of the last year. But such changes must be made by Congress, whose members have squabbled over the best approach. Many members want to lighten the burden on companies, fearing that if the rules are tightened, companies will stop offering pensions entirely. The administration has argued that unless the rules are tightened, more and more plans can be expected to fail, leaving taxpayers on the hook.   NEW YORK TIMES, Sunday Book Review 'American Dynasty': Family Lies By MICHAEL ORESKES Published: January 18, 2004 If Howard Dean (or any other Democrat) is elected president of the United States this year, he (or she) will owe a debt of gratitude to Kevin Phillips. This may seem improbable. Phillips is, of course, legendary for his blueprint of Republican hegemony, ''The Emerging Republican Majority,'' published in 1969. Based on the returns from the 1968 voting and previous presidential races, it described how the rise of the Sun Belt and the suburbs, coupled with Democratic tone-deafness on social issues, was leading to a generation of Republican presidential dominance. The book was ''respectfully dedicated'' by Phillips ''to the emerging Republican majority and its two principal architects: President Richard M. Nixon and Attorney General John N. Mitchell.'' Even Watergate, which swept away his patrons, Nixon and Mitchell (he worked for Mitchell), was not enough to redirect the electoral flow Phillips had observed. In the years from 1968 to now, the Republicans have won six of the nine presidential elections (or five of eight, with one tie, if you prefer). Yet across those years, Phillips, like so many Americans, has drifted away from his partisan identification. He says he is now more of an independent than a Republican, and his recent writing has focused in various versions on the gap in America between rich and poor and the ways it has been exacerbated, in his view, by the policies of Reagan and the two Bushes. News outlets still like to label Phillips a conservative. But his politics have certainly given more solace to the intellectual left in recent years than to the governing right. And now the split is personal. ''I didn't like the Bushes when I was involved in G.O.P. politics before their two presidencies,'' he acknowledges at the end of his latest book. ''And now I better understand why.'' He is referring to the 333 preceding pages of ''American Dynasty: Aristocracy, Fortune, and the Politics of Deceit in the House of Bush,'' a compendium of evils that he says have been handed down for four generations in the Bush family. The book makes two basic and interlocking arguments. The first is that the United States has entered a period of what Phillips calls dynastic politics, in which the spouses and offspring of political figures are picking up where their relatives left off, to the detriment of democracy. The second is that the most important example of this phenomenon is not the Kennedys but the Bushes, who, beginning with George W. Bush's great-grandfathers, Samuel P. Bush and George H. Walker, assembled wealth and power by exploiting ties to Wall Street, arms merchants, the American intelligence apparatus and foreign dictators including Hitler. That wealth and power, and those connections, are why Bush is president today, Phillips says, and why his policies are what they are. Phillips finds the family fingerprints on everything from Bush's pursuit of Saddam Hussein to his leanings toward the energy industry, which, in the web Phillips weaves, are also related to each other. ''George W. Bush's behavior, far from being entirely his own product, is rooted in the dynasty's four-generation evolution and concomitant pattern of deception, dissimulation and disinformation,'' Phillips writes. Oh, sure, he adds, there have been other presidents whose relationship to the truth was erratic. He mentions Johnson, Nixon and Clinton. ''What makes the Bush pattern different, deeper and more worrisome is that it has been almost a century in the making.'' A reader is tempted to shake Phillips and say, aren't we all the products of our forebears? Certainly Hillary argued quite forcefully that Bill's imperfections were the result of his own family dynamic. But that would be to skip the heart of the book. When Kevin Phillips gets rolling, there is no one who makes more historical connections, conclusory leaps and just plain old sweeping statements that transcend the bounds of footnotes. They aren't always convincing, but they sure are exciting. Phillips argues that dynastic politics has risen in the land on the force of two familiar societal ailments -- an infatuation with celebrity and a campaign finance system that favors the established and wealthy -- and one not so familiar tendency: a longing for royalty. ''National politics, in short, has begun to take on the aura of a great family arena. Of the four wives of the major-party presidential nominees in 1996 and 2000, two quickly gained U.S. Senate seats: Hillary Clinton in 2000 and Elizabeth Dole in 2002. A third, Tipper Gore, decided not to make a Senate bid in Tennessee,'' Phillips says. ''Other seats in the U.S. Senate, in the meantime, began to pass more like membership in Britain's House of Lords.'' These include a Chafee in his father's Senate seat in Rhode Island, a Kennedy in his brother's seat in Massachusetts and a Dodd in his father's seat in Connecticut. Both senators from New Hampshire are the sons of former governors, he writes (he doesn't mention that a Daley sits in his father's chair at City Hall in Chicago). The ahistorical American reader should be warned that Phillips really loves comparisons with the history of Britain and Continental Europe. Everything from the Wars of the Roses to the return of Simeon II to Bulgaria parades by. But while there may be reasons to avoid this book, its erudition is not one of them. Most of the historical analogies can be ignored without prejudice to his central case. And case is the word. For Phillips, a graduate of Harvard Law School, sets out to build a case here. ''If there are other families who have more fully epitomized and risen alongside the hundred-year emergence of the U.S. military-industrial complex, the post-1945 national security state and the 21st-century imperium, no one has identified them,'' he writes. ''Certainly no other established a presidential dynasty.'' Lest there be any misunderstanding, Phillips believes this rise is not just an interesting and undertold tale but a record of deceit, self-dealing, secrecy, crony capitalism and, perhaps worst of all, Ivy League elitism. Let it be clear what this book is not. Phillips's publisher has wrapped it with a cover that seems to offer one of those fascinating multigenerational sagas of an American family. The Presidents Bush lean into each other smiling, while beneath are small photos of the family patriarchs. But Phillips is not a writer of history. He is an analyst of demographics and documents, voting patterns and capital accumulation. This skill with data is what made ''The Emerging Republican Majority'' so powerful. It makes this book feel off key. Phillips seems more at home with numbers and connections than with the motivations of men of power. His tone is reminiscent of the muckrakers at the turn of the last century. When Phillips says plutocracy, I hear Lincoln Steffens from ''The Shame of the Cities.'' And the ghost of Ida Tarbell smiles over Phillips's shoulder as he traces in the New York City Directory of Directors the interlocking directorates that put George H. Walker, Prescott Bush, the Harrimans and the Rockefellers in control of companies doing business with the Nazi Reich and the Soviet Union. It's worth noting that Tarbell published her trustbusting history of Standard Oil in 1904, three years after the strike in Texas that set the gushers flowing that would ultimately fuel the rise of the Bush dynasty. Phillips is correct that we do not yet have a full-throated history of the rise of the Bush family and that, given the election of two presidents in 12 years, this is a worrisome gap in our understanding. But he acknowledges that he has not done the research to write that: ''There are a few Bush cousins who might, in the right mood, be candid -- mostly disgruntled grandchildren of George H. Walker, the old buccaneer -- but in the end I did not travel that route.'' So what, then, are the untempered assertions of this book based on? ''Besides my own background of many years in Republican politics,'' Phillips explains, he read a lot of books, newspaper articles, Web sites and magazines. Readers can study the copious footnotes and form their own judgments about the variable reliability of these secondary sources. But what about Phillips's own relationship to the Bushes and how it shapes the book? What were those experiences of many years in Republican politics? He tells us only that in the 1960's he began to develop a ''distaste'' for ''what George H. W. Bush seemed to represent -- a career built on support from a vague 'elite' rather than merit or democratic selection.'' Beyond that, the reader will search in vain for details of Phillips's evolving view of the Bushes, and that is a shame. We are robbed both of whatever firsthand stories Phillips has to tell us and of any way to judge the credibility of his animus. What we are left with is a campaign dossier, full of fascinating items worthy of election-year discussion. A cynical view would be that his publisher knows that screeds sell (the best-seller list shows that the buying of political books is as polarized as everything else in politics). A more generous view is that he is trying to provoke the kind of debate about the Bushes he believes we should have started years ago. Michael Oreskes is an assistant managing editor of The Times.   NEW YORK TIMES: OP-ED COLUMNIST Red Ink Realities By PAUL KRUGMAN Published: January 27, 2004 Even conservatives are starting to admit that George Bush isn't serious when he claims to be doing something about the exploding budget deficit. At best — to borrow the already classic language of the State of the Union address — his administration is engaged in deficit reduction-related program activities. But these admissions have been accompanied by an urban legend about what went wrong. According to cleverly misleading reports from the Heritage Foundation and other like-minded sources, the deficit is growing because Mr. Bush isn't sufficiently conservative: he's allowing runaway growth in domestic spending. This myth is intended to divert attention from the real culprit: sharply reduced tax collections, mainly from corporations and the wealthy. Is domestic spending really exploding? Think about it: farm subsidies aside, which domestic programs have received lavish budget increases over the last three years? Education? Don't be silly: No Child Left Behind is rapidly turning into a sick joke. In fact, many government agencies are severely underfinanced. For example, last month the head of the National Park Service's police admitted to reporters that her force faced serious budget and staff shortages, and was promptly suspended. A recent study by the Center on Budget and Policy Priorities does the math. While overall government spending has risen rapidly since 2001, the great bulk of that increase can be attributed either to outlays on defense and homeland security, or to types of government spending, like unemployment insurance, that automatically rise when the economy is depressed. Why, then, do we face the prospect of huge deficits as far as the eye can see? Part of the answer is the surge in defense and homeland security spending. The main reason for deficits, however, is that revenues have plunged. Federal tax receipts as a share of national income are now at their lowest level since 1950. Of course, most people don't feel that their taxes have fallen sharply. And they're right: taxes that fall mainly on middle-income Americans, like the payroll tax, are still near historic highs. The decline in revenue has come almost entirely from taxes that are mostly paid by the richest 5 percent of families: the personal income tax and the corporate profits tax. These taxes combined now take a smaller share of national income than in any year since World War II. This decline in tax collections from the wealthy is partly the result of the Bush tax cuts, which account for more than half of this year's projected deficit. But it also probably reflects an epidemic of tax avoidance and evasion. Everyone who wants to understand what's happening to the tax system should read "Perfectly Legal," the new book by David Cay Johnston, The Times's tax reporter, who shows how ideologues have made America safe for wealthy people who don't feel like paying taxes. I was particularly struck by Mr. Johnston's description of the carefully staged Senate Finance Committee hearings in 1997-1998. Senators Trent Lott and Frank Murkowski accused the I.R.S. of "Gestapo"-like tactics, and Congress passed new rules that severely restricted the I.R.S.'s ability to investigate suspected tax evaders. Only later, when the cameras were no longer rolling, did it become clear that the whole thing was a con. Most of the charges weren't true, and there was good reason to believe that the star witness, who dramatically described how I.R.S. agents had humiliated him, really was engaged in major-league tax evasion (he eventually paid $23 million, insisting he had done no wrong). And this was part of a larger con. What's playing out in America right now is the bait-and-switch strategy known on the right as "starve the beast." The ultimate goal is to slash government programs that help the poor and the middle class, and use the savings to cut taxes for the rich. But the public would never vote for that. So the right has used deceptive salesmanship to undermine tax enforcement and push through upper-income tax cuts. And now that deficits have emerged, the right insists that they are the result of runaway spending, which must be curbed. While this strategy has been remarkably successful so far, it also offers a big opportunity to the opposition. So here's a test for the Democratic contenders: details of your proposals aside, which of you can do the best job explaining the ongoing budget con to the American people? February 8, 2004, Sunday BOOK REVIEW DESK Happiness Math By John Leland THE PROGRESS PARADOX How Life Gets Better While People Feel Worse. By Gregg Easterbrook. 376 pp. New York: Random House. $24.95. THE CHEATING CULTURE Why More Americans Are Doing Wrong to Get Ahead. By David Callahan. 353 pp. New York: Harcourt. $26. LET the wonkfest begin! Because the money culture of the past decade was so chimerical, it is now time to consider what hit us, what the effects are and most important, why, when so many people got so rich, those of us who spend our lives reading books were so rarely among them. In the last few months Paul Krugman, a columnist at this newspaper, weighed in with his polemical collection ''The Great Unraveling: Losing Our Way In the New Century,'' and Elizabeth Warren and Amelia Warren Tyagi offered ''The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke.'' Both books marshaled compelling statistics and anecdotes into reasons to feel impoverished, or feel better about already feeling that way. And both belong to a little-discussed subgenre of well-constructed, civic-minded books you take on airplanes only to wish in midflight that you'd brought a saucy novel instead. Gregg Easterbrook, a senior editor at The New Republic, and David Callahan, a founder of a policy center called Demos, enter the fray with well-constructed, civic-minded books full of compelling statistics and anecdotes. Easterbrook writes that the rising prosperity of the last 50 years made almost everything so much better for almost everybody that it is sheer perversity -- abetted by Freud, tabloid television and Thomas Pynchon -- to feel bad about most anything. Callahan argues that the winner-take-all ethos of the recent boom has bred dishonesty from the classroom to the boardroom, making life worse for almost everybody. By the rules of the subgenre, the opening chapters of these books come on like crisp newsmagazine features, full of dash and numbers, followed by voluminous examples that basically make the same points, and capped with center-left prescriptions that could have been arrived at without all the bother. Specifically, both call for a higher minimum wage, broader health coverage and tighter corporate oversight. Easterbrook begins with a convincing case for good cheer. More Americans grow up with both parents, better health care, less physical toil, more leisure time, cleaner air and water, bigger homes, higher literacy rates and more cable channels than ever before. Average families now enjoy the privileges recently reserved for the rich: access to college, long life expectancies, fancy vacations, home ownership, central air conditioning and a fleet of cars in the garage. ''Why do so many walk around scowling, rather than smiling at their good fortune in being born into the present generation?'' he asks. Even the poor get too much to eat. When he turns to the other half of his paradox, that people are not happy, it is as if to another book. Ignoring an obvious connection -- that this dissatisfaction is a cause of economic growth, not just a symptom -- he dives into the delightfully named fields of ''happiness math'' and ''forgiveness studies.'' According to the data, once people reach a threshold of about $10,000 a year per person, money has little to do with contentment. People are happy if they are optimistic, grateful and forgiving. He quotes an expert in gratitude research: ''if you only think about your disappointments and unsatisfied wants, you may be prone to unhappiness. If you're fully aware of your disappointments but at the same time thankful for the good that has happened and for your chance to live, you may show higher indices of well-being.'' In other words, if you look on the bright side, you'll see more light. So much for the hundreds of paragraphs about wealth and health that came before. Easterbrook's prescriptions -- a $10-an- hour minimum wage, more foreign aid, lower tariffs on imports -- ignore what he has just said about happiness. These reforms might improve life for millions, but the rising taxes and retail prices he accepts in return are unlikely to make average Americans feel optimistic or grateful. Callahan, too, begins with a full quiver. From the adults around the Little League star Danny Almonte who lied about the boy's age, to the looters at Enron, WorldCom and Tyco, cheating scandals have filled the news. Though Callahan concedes in a postscript that no one really knows whether such cheating is on the rise -- no small concession, given his project -- he makes the case that high payoffs for winners and weak punishments for offenders have combined to encourage dishonesty among students, doctors, lawyers, taxpayers, auto mechanics, job applicants, stock analysts, file sharers and corporate executives. In a society obsessed with the bottom line, he writes, ''The message isn't just that the world is unfair and the rich can get away with murder; it's that people who cut corners get ahead.'' Recent scandals involving mutual fund chiselers and steroid use among baseball players seem timed for the sequel. Callahan invokes a lost age of corporate altruism. He quotes Krugman that before the deregulation of the 1970's, ''America's great corporations behaved more like socialist republics than like cutthroat capitalist enterprises, and top executives behaved more like public-spirited bureaucrats than like captains of industry.'' Even if this portrait were accurate, who would want our economic engines to follow socialist republics, given the way things worked out? Callahan's proposed remedies -- an $8.50 minimum wage, affordable health care, increased financial aid for college, ethics curricula in professional schools, a tougher S.E.C. -- are bigger than the problems they're meant to fix, however seriously you take Little League cheating. Though both of these books are relentlessly big picture, they resist the bigger picture -- which is how their isolated riffs fit into the greater symphony of the boom. The anecdotes and statistics shut out competing theses rather than tackle the mess that the boom so manifestly was. There's no use weighing which view is right, because both take on only a small bit of turf, and because they arrive at the same solutions. In either case, an in-flight movie wouldn't hurt. John Leland is a reporter at The Times and the author of a forthcoming history of hip. Published: 02 - 08 - 2004 , Late Edition - Final , Section 7 , Column 1 , Page 13 February 8, 2004, Sunday BOOK REVIEW DESK Executives Gone Wild By Paul Krugman ORIGINS OF THE CRASH The Great Bubble and Its Undoing. By Roger Lowenstein. 270 pp. New York: Penguin Press. $24.95. BULL! A History of the Boom, 1982-1999. By Maggie Mahar. 486 pp. New York: HarperBusiness. $27.95. Eighteen months ago, American capitalism seemed to be in crisis. Stocks had plunged, and some of the nation's most celebrated business leaders had been exposed as phonies if not crooks. Now the economy is growing, and the Dow's been back above 10,000. Alan Greenspan gave himself a big pat on the back at the American Economic Association meetings, in effect declaring that he was right all along. So is it safe to buy stocks again? After you read Roger Lowenstein's ''Origins of the Crash'' and Maggie Mahar's ''Bull!'' you'll have serious doubts. Both tell the story, from different angles, of how ordinary investors got suckered into supporting the lifestyles of the rich and shameless. And you have to wonder whether anything has really changed. Lowenstein's title may convey the impression that his book is mainly about stock prices. It isn't: it's about the epidemic of corruption that spread through corporate America in the 1990's, though that epidemic was in part both an effect and a cause of the bull market. A better title might have been ''Executives Gone Wild.'' As Lowenstein, also the author of ''Buffett'' and ''When Genius Failed,'' explains, not that long ago the orthodoxy at business schools -- one that corporate management found highly persuasive -- was that the trouble with American executives was that they didn't make enough money. Or, to be more precise, the problem was that they didn't stand to gain enough if their companies did well. The most famous of the business-school theorists, Harvard's Michael Jensen, wrote in 1990 that ''corporate America pays its most important leaders like bureaucrats. Is it any wonder, then, that so many C.E.O.'s act like bureaucrats?'' The answer suggested by these theorists, and eagerly adopted by much of corporate America, was to hand executives huge grants of stock options to give them a stake in corporate success. It didn't. For one thing, once the principle of giving chief executives gigantic paychecks in return for performance had been established, acquiescent boards found ways to keep those gigantic paychecks coming even when executive performance was mediocre or worse. Lowenstein describes how Michael Eisner, the C.E.O. of Disney, managed to get paid $800 million over a 13-year period, while delivering a return to investors less than they would have gotten from Treasury bonds.+Worse yet, rewarding executives for even brief increases in a company's stock price encouraged, even mandated, creative accounting that kept reported profits high and growing. In 2001 a chastened Jensen wrote an article titled ''How Stock Options Reward Managers for Destroying Value.'' And those who cooked the books weren't just richly rewarded; they were celebrated. In 1998, CFO Magazine gave an Excellence award to Scott Sullivan, the chief financial executive of WorldCom. In 1999 it gave one to Andrew Fastow of Enron. And in 2000, it gave one to Mark Swartz of Tyco. All three have since been indicted. Those who tried to blow the whistle were silenced. Lowenstein tells the sad story of James Bingham, an assistant treasurer at Xerox who was ordered to ''destroy'' an e-mail message warning of accounting misstatements. When that instruction became public, the company characterized it as an ''unfortunate selection of words.'' Then the company fired him. Two years later, all his misgivings were confirmed. What happened to the regulators? Bipartisan pressure prevented public watchdogs from doing their job. When the Financial Accounting Standards Board tried to get companies to account for the cost of issuing stock options, Kathleen Brown, the Democratic California treasurer, led a public rally at which she shouted ''Give stocks a chance!' Alan Greenspan -- who Mahar says won his job as Federal Reserve chairman ''first and foremost because he was a Republican'' -- emerges as a particular villain, not just because he so quickly switched from condemning irrational exuberance to cheering it on. Faced with growing concerns about accounting for derivatives, he ''repeatedly sided with private bankers to inhibit controls and even to suppress disclosure.'' After the collapse of the hedge fund Long-Term Capital Management, which nearly caused a global financial crisis, Greenspan called for less regulation.+ If you have been following the story of corporate scandal, ''Origins of the Crash'' won't add that much to your understanding. But if you don't know quite what happened at Enron and WorldCom, and why they weren't just isolated bad apples, Lowenstein's book is an excellent introduction. Yet I do have two complaints. One is that the book is a bit drier than one might have expected. It is, after all, a lurid story; that luridness doesn't really come through. The other is that Lowenstein doesn't spend much time explaining why the public was so easily fooled. For that, turn to ''Bull!'' -- which also has a lot of the writing pizazz somewhat lacking in ''Origins of the Crash.'' Mahar's focus is not on corporate corruption, but on the enablers who cheered on false business heroes and made the corruption possible. Though she tries to frame the book as an investment guide, it reads more naturally as an indictment of stock analysts and the financial media.+What I learned -- something I didn't fully appreciate before -- was the extent to which the stock market bubble of the 1990's was supported by intimidation as well as exuberance.+Mahar,+formerly+a+writer+for+Barron's+and+Bloomberg, opens with a scene from the life of Henry Blodget -- who became famous for valuing Amazon at $400 and has since become a symbol of dot-com delusions -- at the height of his fame. This not a tale of arrogance, it's a tale of fear: Blodget, who'd been slightly negative about a stock, receives an abusive phone call from a fund manager who owned the stock and resolves never to be negative again. A bit later we get the plight of Prudential's Ralph Acampora, who had to be given a bodyguard after he warned of a bear market. Not all the intimidation was that explicit. To some extent, analysts and money managers simply felt that they had to run with the herd. Mahar quotes Laurence Siegel of the Ford Foundation: ''You can be wrong and with the crowd, which isn't actually so bad. . . . Or you can be wrong and alone and then you really look like an idiot.'' What's striking in Mahar's account is the extent to which the forces that cowed analysts and money managers into going along with the trend also biased press coverage. Partly this was because the public didn't want to hear bad news. David Faber, CNBC's investigative reporter, gives a remarkably blunt explanation of why he didn't do much, you know, investigating: ''When you break a big story, for example, about fraud at a Waste Management or a Cendant . . . the response wasn't necessarily as encouraging as you might have expected.'' But it wasn't just audience lack of interest that led to the de facto coverup. Newsweek's Allan Sloan sized up AOL correctly, realizing that it wasn't profitable and had little hope of becoming so, but says ''his bosses objected to his constant carping about AOL's numbers: ''Whenever I published one of these stories, everyone would carry on.'' Louis Rukeyser fired Warburg's Gail Dudack from ''Wall Street Week'' in late 1999 -- just a few months before the market turned sharply down -- because of her bearishness. And let's give special mention to The Wall Street Journal, which not only promoted ''Dow 36,000'' (which Mahar describes as ''mildly lunatic''), but in 1998 told its readers to ''rest easy'': ''U.S. corporate accounting has been getting steadily more conservative in recent years, not less so.'' In other words, we shouldn't blame the public too much for getting caught up in irrational exuberance. Foolish ideas were made to seem sensible by the unanimous optimism of analysts and the financial media. That unanimity was the product of a climate of fear in which everyone knew that asking hard questions put your career at risk. It wasn't just a market bubble: the system failed. Which brings us back to the question I asked earlier: is it safe to buy stocks again? Very few of the corporate villains have faced charges, fewer still have been convicted: some are still running what's left of their companies, others ruined their stockholders and employees but did very well for themselves, thank you. It's hard to escape the feeling that the forces that suckered so many Americans during the boom years are ready to do it again. Paul Krugman is an Op-Ed columnist for The Times. Published: 02 - 08 - 2004 , Late Edition - Final , Section 7 , Column 1 , Page 9 NEW YORK TIMES FLOYD NORRIS Do Falling Interest Rates Cause Investors to Take Dangerous Risks? Published: March 12, 2004 FORE than two decades ago, Latin American countries defaulted on their debts - and the world banking system quaked. Now, Argentina has to be forced even to negotiate with its lenders on debts that went into default in 2001. But no one is worried about the banks. Call it the democratization of risk. These days, when the going gets tough for lenders, the risk seems most often to be borne by investors, not financial institutions. In the case of Argentina, a not insignificant part of that risk ended up with individual investors in Italy - 250,000 of them, according to Mauro Sandri, a lawyer representing them - who kept buying until the default occurred. Since then, Argentina has not shown an excess of eagerness to reach a deal with its creditors. This week the International Monetary Fund forced Argentina to promise to negotiate, although it remains to be seen how much, if any, the country is willing to improve its offer. That offer would give creditors about 8 cents on the dollar if you consider accrued but unpaid interest in your calculations. The new order of things is clearly good for the financial system, if not for the unfortunate owners of Argentine bonds. Even banks that survived the 1980's crisis were less able - not to mention less willing - to lend in the early 1990's as the economy came out of recession ever so slowly. That may have played a role in the failure of the first President Bush to win a second term. Now the share prices of banks are rising, and credit is readily available. But the democratization of debt creates other problems. It is harder to negotiate a deal when a debtor does get into trouble, and it is increasingly difficult to know just where the risk resides. In the 1980's it was possible to get 20 banks in a room and be confident that all the important players were there, and were able to cut a deal if they wished to do so. Now with capital markets rather than banks making the loans, it is hard to know who has the risk, and virtually impossible to get them all together. If you knew who owned the bonds, which is not easy to find out even for the issuer, the existence of credit derivatives means you cannot be sure who really stands to suffer from a default. There is no way to be sure, until it is too late, whether derivatives are allowing risks to be spread around or whether they are concentrating risks in a dangerous way. It is easy to sneer at the Italian investors who bought the Argentine bonds. But their experience may prove to be far from unique. There is nothing like falling interest rates to make otherwise rational people willing to take irrational risks. The Italians began to buy when the convergence of European interest rates, as part of the run-up to the establishment of the euro, led to big declines in Italian rates. Now it is American rates that have fallen to shockingly low levels. "The last 12 months saw wild moves out the risk curve,'' said Robert J. Barbera, the chief economist at Hoenig, noting that the average junk bond now yields less than 7 percent and that emerging market debt - Argentina excluded - also found plentiful buyers. "All these risky endeavors got capital cheaply.'' And they are getting plenty of it. In 2004, reports John Lonski, the chief economist of Moody's, companies rated Caa - the nether region of junk - have raised $6.8 billion. That is triple what they raised in 2002. It reminds him of the complacent days of early 1998, before crises in Russia and then Asia petrified bond investors. In Argentina, paying foreign creditors is politically unpopular, even though the economy is doing well. But if Argentina cuts a deal soon, it could refinance its debt, and perhaps borrow more, at really cheap rates. Borrowers have reason to rejoice. But those putting up the money may regret it . "There is a great deal of confidence,'' Mr. Lonski said. "It may be misplaced.'' NYTimes Corporate Tax Holidays Published: April 13, 2004 Here's unwelcome news for individuals scrambling this week to file their taxes: Almost two-thirds of America's corporations paid no federal income taxes during the late 1990's, when corporate profits were soaring. Nine out of 10 companies paid less than the equivalent of 5 percent of their total income. After allowable deductions, companies ostensibly face a 35 percent rate. Meanwhile, as David Cay Johnston reported in yesterday's Times, the government is doing less to enforce the law. Over the last decade, the audit rate for the largest corporations has fallen by almost half. Corporate tax avoiders are a major problem that needs immediate action. They are both a straightforward fiscal problem — with federal coffers being denied needed money at a time of spiralling deficits — and a broader threat to our civic culture. It's never healthy to have tax rates become merely academic. Just look at the recent history of Latin America's crippled economies. Corporate taxes now account for about 7.5 percent of overall federal tax receipts, down from a high of 40 percent during World War II. What corporate America's proper share ought to be is not obvious, but it's a political issue that calls for an open debate. Instead, what's happening is highly corrosive to any democracy. Corporate tax rates have been scaled back by subterfuge and an ever-expanding web of shelters and loopholes. In 2000, American companies paid an average of only $14.75 in taxes for every $1,000 in gross revenue, according to a recent study by the General Accounting Office. Sophisticated tax dodging — much of it falling in that gray region separating the flagrantly illegal from the merely inappropriate — helps render actual rates meaningless. Despite one of the highest ostensible corporate tax rates in the industrialized world, American companies are in fact among the least taxed. This oddity undermines the integrity of the system and makes a mockery of those who actually try to pay their fair share. It would be far healthier to reduce corporate tax rates modestly while simplifying the system to ensure compliance, as John Kerry is proposing. His plan, which seeks to make it more difficult for companies to defer paying taxes on their overseas profits, remains a bit muddled by his desire to package it as an anti-outsourcing measure. But at least the senator is raising the subject. Despite much talk in Washington about the need for meaningful corporate tax reform, it's not an issue that the Bush administration has ever been prepared to address in a serious manner. This cannot go on indefinitely. The credibility of the tax code is in dire need of some shoring up.   NYTimes.com, OP-ED CONTRIBUTOR The Department of Internal Resentment By RICHARD YANCEY Published: April 14, 2004 KNOXVILLE, Tenn. — For nearly 13 years, until October 2003, I was a tax collector for the Internal Revenue Service. I was a field officer, spending the majority of my time making unannounced visits to businesses and individuals who owed federal taxes. I never expected a warm reception and rarely did I receive one. And whose doors did I knock on? The carpet installer, the day-care center operator, the Wal-Mart clerk, the carpenter, the print shop owner. The majority of the taxes I collected were from the small-business owner with fewer than 20 employees. I long ago lost count of how many weed-choked fields I have trudged across to inspect some broken-down piece of farm equipment; how many musty warehouses, dilapidated mobile homes, cluttered shops and offices reeking of sweat and that peculiar odor of human desperation I have sat in; the number of ill-educated tradesmen, struggling entrepreneurs and desperate homemakers I have interrogated, demanding the impossible and promising the full fury of my federal power when my demands could not be met. It is no secret that the nation's tax code favors the wealthy and protects big business. (An astounding 63 percent of United States corporations paid no federal income tax at all in 2000.) The individuals and businesses I encountered during my career did not have an army of tax lawyers, certified public accountants and lobbyists to guide and protect them. Most netted less than $30,000 per year. Most operated out of rundown store fronts in tired strip malls. Most were honest people who knew my arrival was the death knell of their American dream. It should come as no surprise: the I.R.S. goes where the money's owed, and the money is owed by the little guy. When the service was reorganized in the late 1990's, it moved collection personnel to the small business/self-employed division; the other compliance division, which handles medium and large businesses, has no collection employees at all. Squeezed between a complex tax code that favors big business and an agency that marshals the entirety of its resources against him, the little guy doesn't stand a chance. He doesn't have the money to pay or to find a way out of paying. Congress has not been completely deaf to the cries of the multitudes that the I.R.S., inebriated from years of imbibing absolute power, had a drinking problem. The reforms were intended, in part, to transform the ultimate bureaucratic bully into a convivial playmate. Inside the service, however, the bully culture endures. The truth is that most I.R.S. employees fear their employer more than the average taxpayer does. Most middle- and upper-level managers rose to power long before 1998, men and women (but mostly men) who learned as front-line employees the spoils of civil service (promotions and awards) come in direct proportion to the amount of power they exerted over taxpayers, invariably in the form of confiscation. As my on-the-job trainer informed me early in my career, if I wanted to advance my career in the I.R.S., I had to seize assets. And it didn't matter what I seized — the I.R.S. could always make equity. Thus those who wield true power within the I.R.S. — the elite who determine policy, organization and procedure — perpetuate the culture of fear and intimidation, for it is the only way of life they have ever known. Fear and intimidation got them where they are — why should they change? Congress can rewrite the laws, but it can't change human nature or the nature of power. The result is some of the worst collection statistics in the agency's history and a decimated, demoralized rank-and-file squeezed between the demands of the bullies above and the rights of its "clients" below. Commissioner Mark W. Everson has promised the I.R.S. will get back into the enforcement business. This is both heartening and frightening. Confidence in our tax system relies on the public's belief that the tax laws are administered fairly — that nobody escapes the wrath of the taxman. But as long as Congress passes laws that favor big business and the richest among us, as long as money buys protection and influence, there will never be true reform. Only the little people pay taxes, Leona Helmsley once said. It's true: our government makes sure of it. Richard Yancey is the author of "Confessions of a Tax Collector: One Man's Tour of Duty Inside the I.R.S." NEW YORK TIMES: May 2, 2004, Sunday SUNDAYBUSINESS Hat Trick: A 3rd Unit Of Marsh Under Fire By GRETCHEN MORGENSON (NYT) 2352 words FOR years, Marsh & McLennan Companies, the financial services colossus, had maintained a low profile, quietly racking up outsized profits as the ultimate Wall Street middleman. By acting as an intermediary to corporate and individual clients, it avoided problems that often plagued its more glamorous rivals, who made riskier bets on markets, companies or properties. Not anymore. As regulators continue to plumb the conflicts of interest that permeate much of the financial world, Marsh & McLennan's days of relative anonymity -- not to mention hefty, low-risk profits -- may be over. Marsh, as it is known, wears three hats: it performs insurance brokerage services for corporate clients, dispenses investment advice through Putnam Investments and offers consulting services through Mercer Inc. Two of its businesses were already under a microscope. Last month, the company paid $110 million to settle regulatory accusations by Massachusetts and the Securities and Exchange Commission that lax oversight at Putnam allowed some fund managers to benefit personally from inside information. And in December, the S.E.C. began an inquiry into possible conflicts among pension consultants, including Mercer Inc. Now, Marsh's biggest business has attracted official attention. Just over a week ago, it acknowledged that Eliot Spitzer, the New York attorney general, is investigating practices at its huge, immensely profitable insurance brokerage division. The latest salvo from Mr. Spitzer, whose investigation into Putnam is continuing, means Marsh has pulled off a rare trifecta -- all three of its businesses are being scrutinized by regulators. A spokeswoman for Marsh said that company officials would not comment for this article. Marsh is not the only insurance broker Mr. Spitzer is investigating . Three other industry players -- the Aon Corporation, Willis Group Holdings and Kaye Insurance Associates -- have acknowledged receiving subpoenas from his office. And Mr. Spitzer has written to insurers to ask for details about their arrangements with brokers. ''We are at the early stages of an investigation and are very interested in what we are finding,'' Mr. Spitzer said last week. He declined to comment further on the investigation, which centers on contingency fees that insurance companies pay to insurance brokers who steer them business. Brokers have a fiduciary duty to find the best coverage at the best price for their clients. At issue is whether the fees encourage insurance brokers to put their own interests ahead of the interests of their clients. THE fee payments, known as placement service agreements, range from 5 percent to 7.5 percent of the insurance that is underwritten. They are typically paid above the regular commissions of 15 percent that insurance brokers charge when they match an insurer with a corporation that needs coverage. Because contingency fees do not require a broker to perform any additional service or make additional expenditures, they are extremely profitable. By one analyst's estimate, contingent commissions account for roughly 5 percent of the brokerage industry's revenue but can total more than 30 percent of a broker's net income. The New York Insurance Department is also investigating the contingency fees, as is John Garamendi, the California insurance commissioner. ''As a result of business channeled to the company that is paying the broker, the interest of the insurance broker is foremost rather than the interest of the consumer,'' Mr. Garamendi said. ''Hence these arrangements are suspect and now subject to investigation by my department.'' The companies under investigation have all said that the fee agreements have been around for decades and that their existence is disclosed to their clients. They have declined to comment on the investigations. Last week, Jeffrey W. Greenberg, the chairman and chief executive officer of Marsh, sent a memorandum to his staff defending the agreements, calling them a ''long-standing, common industry practice.'' A spokesman for Aon provided a statement saying that the agreements are an age-old and common practice. ''Aon discloses such arrangements in fee agreements with clients, invoices to clients, and its Web site,'' the company said. But even as the major insurance brokers play down the inquiries by Mr. Spitzer and others, insurance analysts say that the agreements are overdue for investigation. And because the contingency fees have contributed to significant increases in profitability for insurance brokers in recent years, any reduction in the arrangements likely will have a big impact on their financial results. Alice D. Schroeder, an advisory director at Morgan Stanley and former insurance analyst for the firm, said she had heard complaints about contingency fees for years from companies who use brokers to buy insurance for them. ''It is not surprising that this is finally coming to a head,'' she said. ''At a time when margins everywhere are under pressure and companies are trying to give the best deal to their customers, this is one industry where that hasn't happened. But now it looks like it will.'' Nobody has more to lose in such a situation than Marsh & McLennan, the world's largest insurance broker, which provides risk and insurance services to clients in 100 countries. Almost $7 billion, or roughly 60 percent of the company's $11.5 billion in revenues last year, came from brokering insurance to corporate clients. Mercer's consulting services contributed 23 percent of sales while Putnam's investment management generated 17 percent. DURING the first quarter, Marsh's risk and insurance services revenues hit $2 billion, a 12 percent jump from a year ago. Operating income did even better, rising 14 percent to $637 million. By comparison, Mercer's operating income increased just 7 percent in the period to $89 million and Putnam reported a $26 million operating loss. Happily for Marsh & McLennan, its insurance business has offset a continuing investor exodus from Putnam. In March, investors withdrew $2.3 billion from Putnam funds, the largest outflows of any fund company. March was the 34th consecutive month of net outflows for Putnam. Mercer's consulting business, while profitable, has increased risks as well. Regulators are investigating the potential conflicts in pension consulting -- including how the consultants choose money managers to recommend to pension fund clients. Mercer is also one of the compensation consultants in the middle of the fracas over pay received by Richard A. Grasso, former chairman of the New York Stock Exchange. Edward A.H. Siedle, president of the Benchmark Companies in Ocean Ridge, Fla., is a securities lawyer and former S.E.C. official in fund regulation who investigates fraudulent activity among pension fund managers. He said that the potential liability for pension consultants is huge compared with the revenues their services generate because the funds can sue them for the entire amount of an investment they have made if the consultants are found to have acted improperly. ''The work I'm doing around the country suing pension consultants on behalf of funds is making all pension consultants very nervous about the potential liability relating to consulting,'' Mr. Siedle said. ''As a result, many of them are rethinking the risk-reward calculation.'' But the biggest cloud hanging over Marsh is the potential damage to profits that could result from a prolonged investigation into insurance broker contingency fees. After all, Marsh's brokerage unit is among the largest recipients of these fees in the country, if not the largest. Under the contingency fee arrangements, insurance brokers can earn extra fees either on the front end, based on the volume of business done with an insurer, or the back end, based on the profits the insurer generated on the coverage it provided. Both arrangements have the potential for serious conflicts. Upfront fees paid by an insurer based on the dollar amount of business brought to it by a broker could encourage the broker to recommend an insurer to a client because of the fees, not because the insurer offers the best coverage. Alternatively, fees based on how profitable an insurance contract turned out to be for an insurer could call into question a broker's objectivity in helping a corporate customer settle a claim. Insurance brokers can play big roles in helping settle a client's claim by interpreting policy language, for example, or acting as expert witnesses for the insured in court cases. If a client settling a claim with an insurer subsequently learns that his broker earned $100,000 in contingency fees from that insurer, the broker's role as an unbiased provider of services can be questioned. This is why the vague disclosure that typically surrounds contingency fees -- only that such fees may be earned, not necessarily how much they amount to -- is so troubling. And what if a broker steered a client to an insurer that later filed for bankruptcy, as Reliance Group Holdings did in 2001, and the company that bought the insurance learned that Reliance had paid the broker contingency fees on the referral? Dowling & Partners, a research firm in Farmington, Conn., specializing in insurance companies, has estimated how much of Marsh's profitability comes from contingency fees. The firm said that last year, Marsh's contingency fee revenues could have totaled $700 million; after taxes, the fees could have generated $450 million, or 30 percent of the insurance unit's earnings. There is no doubt that Marsh's profits in risk and insurance services have rocketed in recent years as the contingency fees have become more popular. In 1998, profits in the segment totaled 18.3 percent of sales; by last year, they had risen to 25.5 percent. Some of that had to do with cost cutting and accounting treatment of acquisitions, but contingent fees certainly contributed, analysts said. Another source of potential conflicts in the insurance brokerage industry is a practice known as tying or leveraging, which occurs when an insurance company wants to buy reinsurance to offset some of its risk. Some insurance brokers have threatened to stop sending primary insurance business to the insurance company unless it agrees to let them broker all its reinsurance needs in return. Profits for brokers on reinsurance revenues are far higher than they are on primary insurance. In March 2003, Linda F. Golodner, president of the National Consumers League, a nonprofit consumer organization in Washington, wrote to officials in four states, urging them to investigate tying practices. ''We are concerned not only that this practice is unethical, but that it impacts the price that property and casualty insurance companies charge consumers and businesses,'' Ms. Golodner wrote. ''Reinsurance is the second highest expense after personnel costs for these companies.'' Ms. Golodner said that she wrote the letter after several employees of insurance companies contacted her office describing and criticizing the practice of tying. She received responses from officials in three states, California, Connecticut and Florida, who said they would look into the matter, but she has heard nothing since. Tying arrangements are not disclosed to insurance brokers' customers. New York was the other state to receive a letter from Ms. Golodner. Insurance industry experts say that shedding light on the cozy and secretive world of insurance brokerage will benefit the companies that use the brokers' services. Certainly brokers play a valuable role providing a distribution service for insurers and some industry analysts said insurers would still be willing to pay for it. But with two major companies dominating the business -- Aon and Marsh -- the industry is essentially a duopoly. And insurance brokers have kept such a tight control over pricing and product information that many officials at companies who buy insurance -- known as risk managers -- say the brokers' control over distribution gives them absolute power in the insurance buying process. Insurance brokers have several ways of controlling their customers, industry experts added. For example, brokers maintain all claims data for their customers, and have a contractual obligation to manage and process all claims on a case even if the broker no longer has a relationship with the insured. Some insurance analysts say that this is one reason brokers' customers rarely jump ship: they fear that the fired broker would not give its former customer good servicing on its continuing claims. ''You have two companies that in effect have the right to charge a toll to everybody and nobody can do anything without their consent,'' said an analyst who insisted on anonymity, fearing reprisals from the brokerages. ''They have pushed margins farther than they can go in a healthy business model and they will come down.'' Another analyst who declined to be identified said that an additional reason the insurance brokers want their fee agreements kept under wraps is that if the terms are made public, investors will know how lucrative they are and realize that traditional insurance brokerage profits are not as high as many had assumed. MARSH'S stock has held up remarkably well since the investigation by Mr. Spitzer was disclosed. Then, the company's shares stood at $45.99. On Friday, they closed at $45.10. The stock is down 5.83 percent this year. ''Potential outcomes of the current investigation range from fines and an increased disclosure requirement on the part of the brokers to an actual change in the business practice of arranging and documenting contingent fee agreements,'' said David Mocklow, managing director at Cochran, Caronia Securities L.L.C., a research firm specializing in the insurance arena. ''It remains to be seen whether Spitzer would deem the current practice as one that causes a conflict for the broker and therefore would seek to prevent brokers from accepting any payments from the insurance carriers.'' It seems fairly clear, even early in Mr. Spitzer's investigation, that the rules of engagement in the lucrative insurance brokerage business will change. The brokers may not want to admit it, but investors should. Correction: May 9, 2004, Sunday A picture caption last Sunday with an article about the Marsh & McLennan Companies reversed the identities of two executives and gave an outdated title for one of them. Jeffrey W. Greenberg, the chief executive, was at the right; Charles E. Haldeman, now president and chief executive of the company's Putnam Investments unit, at the left; Mr. Haldeman was promoted last November from senior managing director.   NEW YORK TIMES Big Gap Found in Taxation of Wages and Investments By EDMUND L. ANDREWS Published: May 8, 2004 ASHINGTON, May 7 - Americans are being taxed more than twice as heavily on earnings from work as they are on investment income, even though more than half of all investment income goes to the wealthiest 5 percent of taxpayers, a new study has estimated. The study, which applied the most current tax laws to a database of 186,000 tax returns, found that federal income taxes on wages and other earnings average about 10.7 percent and that payroll taxes for Medicare and Social Security take another 12.7 percent. By contrast, federal taxes on investment income average about 9.6 percent. The study was produced by Citizens for Tax Justice, a liberal nonprofit research organization that has criticized tax breaks for corporations and the wealthy. Extrapolating from data supplied by the Internal Revenue Service, the study estimated that 43 percent of all investment income goes to the wealthiest 1 percent of households and 60 percent goes to the top 5 percent. "The huge disparity in taxation between earnings and investment income should shock average American taxpayers," said Robert S. McIntyre, director of Citizens for Tax Justice. Tax experts said the calculations conformed with their own sense of the current tax code. The centerpiece of President Bush's last big tax package was a provision that halved taxes on stock dividends and reduced the top tax rate on capital gains to 15 percent, from 20 percent. Mr. Bush is proposing to exclude a huge share of investment profits from all taxation, by letting people contribute thousands of dollars a year in new retirement accounts and "lifetime savings accounts," with tax-free earnings. "Conservatives and people like me would argue that the proper tax rate on investment income ought to be zero," said Chris Edwards, a tax analyst at the Cato Institute, a research group in Washington that advocates deep tax cuts. "The whole paradigm on the right is to move away from taxing investment income and just tax income when it is consumed." Alan Auerbach, a professor of economics and law at the University of California, Berkeley and an informal adviser to Senator John Kerry, said Congress had steadily made the tax code more favorable to investors over many years. "Certainly, recent policy changes have been tilted in favor of investors," Mr. Auerbach said. "But there has often been a struggle between giving people incentives to save and trying to have fairness." The tax rate on investment profits is already an issue in the presidential election campaign. Mr. Kerry has vowed to eliminate last year's tax cut on stock dividends for the wealthiest taxpayers. President Bush has placed a priority on making the dividend tax cut permanent. Some of Mr. Bush's economic advisers would like to go much further, essentially scrapping taxes on investment income and replacing it with a broad consumption tax. The sweeping tax overhaul of 1986, which drastically lowered top tax rates for the wealthy but also wiped out scores of tax breaks, changed the tax rates for stock market profits and most other investment income so that they were taxed at the same rate as earnings from wages and salaries. But within a few years, Congress began passing measures that gradually reintroduced the tax preference for investment income. In 1991, President George H. W. Bush and Congress agreed to raise the top tax rate on personal income to 31 percent from 28 percent, but the top rate on long-term capital gains remained at 28 percent. President Bill Clinton later pushed through another increase in the top bracket for income taxes, to 39.6 percent, but Congress left the top rate on capital gains at 28 percent. In 1997, Congress widened the margin again by reducing the top rate on capital gains to 20 percent. Tax accountants began figuring out ways for wealthy clients to shelter their income. Existing laws continued to let people shelter investment income in tax-advantaged retirement accounts, college savings plans and tax-free municipal bonds. Mr. McIntyre said President Bush's tax cuts widened the preference for investors, reducing taxes on investment income by 22 percent while reducing taxes on ordinary earnings by 9 percent. By his calculations, the average tax rate on ordinary earnings was 2.1 times that on investment income when Mr. Bush became president and became 2.5 times after last year's tax cuts. If investment income were taxed exactly as earnings from work, Mr. McIntyre concluded, government tax revenues would increase by about $338 billion this year. Ninety-five percent of taxpayers would keep about two-thirds of their recent tax cuts, he estimated, while the average tax rate on the wealthiest 1 percent of taxpayers would rise to 33 percent, from 22 percent. NEW YORK TIMES Editorial Tax Relief Charade Published: May 13, 2004 Last week, House Republicans were the driving force behind the passage of a stopgap measure intended to provide relief for taxpayers who have been hit of late with the alternative minimum tax. The relief is sorely needed. But the House's measure is disingenuous — a temporary fix that will mollify justifiably aggrieved taxpayers in the short run while obscuring the real cause of the alternative tax problem and, by extension, dangerous flaws in the Bush administration's tax policy. The alternative minimum tax is built into the federal tax code to ensure that superwealthy taxpayers don't use excessive tax breaks to avoid paying their fair share. In the 1990's, it never applied to more than about one million people a year. But in recent years, the tax has begun afflicting middle-class and upper-middle-class taxpayers who are far from the multimillionaires it was intended to affect. This year, about three million taxpayers will owe this tax. Without corrective action, nearly 30 million taxpayers will be affected in 2010, most of them making $50,000 to $200,000. Part of the problem is that the alternative minimum tax was not designed to reflect the effects of inflation, so the House's fix would provide some inflation protection by increasing the thresholds for the tax through 2005. But a more serious cause is the Bush tax cuts of 2001 and 2003. When the tax cuts were enacted, no corresponding changes were made to the alternative tax. So as the tax cuts reduce the liability on a filer's Form 1040, the alternative tax liability looms relatively larger. In effect, most taxpayers snared by this tax will be giving back all or part of the tax savings they were supposed to reap from the Bush tax cuts. This consequence was not unforeseen — the alternative tax has been studied from every conceivable angle for over a decade. It is allowed to endure in its current form for only one reason: to mask the tax cuts' disastrous effect on the deficit. As long as the alternative tax is on the books, official budget estimates include the revenue it is projected to raise from middle-class taxpayers — even though the administration and Congress are publicly committed to ensuring that those same taxpayers won't have to pay. One way or the other, then, the administration's tax plan is sheer duplicity. Either middle-class Americans will find their supposed tax cuts gobbled up by the alternative tax, or the deficit will be far larger than the administration projects. The hidden budget hole is enormous. Right now, the administration argues that Congress must permanently extend the Bush tax cuts. According to estimates by the Tax Policy Center of the Urban Institute and the Brookings Institution, the cost of doing so, without reforming the alternative tax, is about $1.2 trillion. If the alternative tax is reformed so it won't apply to middle-class taxpayers, the cost will explode to nearly $2 trillion. The Senate is expected to pass the House's temporary fix, but middle-class taxpayers should not be fooled. They will either get little if any benefit from the Bush tax cuts, or they will get a deficit that has ballooned beyond anyone's worst nightmare. BOOKS OF THE TIMES | 'RUNNING ON EMPTY' While the Politicians Fiddle, America Goes Broke By CHRISTOPHER CALDWELL Published: August 12, 2004 When George W. Bush was governor of Texas, Peter G. Peterson tried to convince him that the rickety finances of Social Security and Medicare posed a pressing philosophical and moral question. Mr. Peterson has been chairman of several corporations and of the Federal Reserve Bank of New York and was secretary of commerce under President Richard M. Nixon. As president of the Concord Coalition he has warned that politicians are endangering the economy by recklessly promising government benefits that they have no will - and no way - to finance. The question he raised with Governor Bush was ''whether a modern, media-driven democracy that only focuses on immediate crises could respond effectively to a very different kind of threat - a silent, slow-motion, long-term crisis like entitlements." Three years into the Bush administration, Mr. Peterson has his answer. It is no. Benefit spending now takes up an eighth of gross domestic product and is rising steeply. The deficit has spiked alarmingly since 2000, and under the most favorable demographic circumstances imaginable: for the past two decades the huge baby-boom generation has been in its prime work years, paying benefits for a relatively small number of nonworking seniors and children. Things are about to change dramatically for the worse. Soon, senescent boomers will be collecting the checks, and there will be only two-and-a-quarter workers per beneficiary. With precision and punch, Mr. Peterson's "Running on Empty" lays out why we are in a lousy position to dig ourselves out of this hole. The United States now has the lowest savings rate in the developed world. Much of the growth in entitlements has been paid for by defense cuts that were reaching their limits even before Sept. 11. The annual current-account deficit - what America has to borrow to finance its excess of imports over exports - is a dangerously high $540 billion, or 5.1 percent of gross domestic product. Net financial liabilities to foreigners have risen to $2.6 trillion today, from zero in 1980. With a third of public debt held abroad, the consoling thought that ''we owe it to ourselves" is no longer operative. How we reached this pass can be stated simply: Republicans undertax, while Democrats overspend. For decades, Mr. Peterson writes, Democrats ''labored patiently to purge America of its traditional aversion to deficits," bribing voters with jobs and social-service programs that the country could not afford. Starting with the Emergency Recovery Tax Act of 1981, though, Republicans have learned that tax cuts and write-offs can be used as bribes in exactly the same way. Dependent on deficit spending, both parties have blown through every institutional constraint erected against reckless tax cuts and benefit expansions, from the Gramm-Rudman deficit ceilings of the 1980's to the Budget Enforcement Act of 1990. And they have blown the Social Security-tax surpluses meant to offset predictable future shortfalls. While Mr. Peterson blames both parties for conniving against fiscal common sense, he puts the present administration in a class of its own. George W. Bush has discarded traditional Republican qualms against big government, replacing the old Democratic model of tax-and-spend with his own model of borrow-and-spend. Thanks to three unaffordable tax cuts and an unfinanced Medicare drug benefit that will eventually cost $2 trillion a decade, Mr. Peterson writes, ''this administration and the Republican Congress have presided over the biggest, most reckless deterioration of America's finances in history." Unfortunately, fixing the federal budget will require more than just cleaning up after the Bush administration, Mr. Peterson warns. Revenue lost from the Bush tax cuts will indeed have to be recaptured, but the fiscal threat from entitlement programs functioning normally is 10 times as large. Mr. Peterson recommends a program to reform them. Switching from wage-indexing to price-indexing, as Britain has done, and establishing mandatory savings programs could put Social Security on a sound footing by midcentury, he writes. Medicare and Medicaid, which will cost more than Social Security by the end of this decade, are trickier. Mr. Peterson would start by introducing ''managed competition," capping the deductibility of employer health plans and reining in malpractice lawyers. He would reform the budget process by reinstating the Budget Enforcement Act of 1990, which required cuts to balance new spending. Mr. Peterson has laid out his level-headed argument at book length several times now. Why has it continued to be ignored? Maybe Americans have tacitly given up on the idea that large, New Deal-style entitlement programs can work over the long term - whether because such programs inevitably get corrupted by politics and bureaucracy, or because even a well-managed welfare state is a competitive albatross in an age of globalization. Mr. Peterson himself notes that nine-tenths of baby boomers think ''government has made financial promises to [their] generation that it will not be able to keep." The guarantee of a secure retirement is already being rescinded in the minds of the citizenry, if not yet in the statute books. But Mr. Peterson also entertains a darker possibility: that ''our national leaders are providing the American people with precisely what they want." Debt, he notes, is particularly alluring in periods of partisan intransigence. If the two sides cannot compromise on priorities, each can take what it wants while dumping the bill on future generations. Americans used to understand this temptation and flee it. Thomas Jefferson warned: ''To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude." So it may be that some terrible change has come over the national psychology that admits to only two diagnoses. Either the complexity of government has outrun the capacity of a democratic public to understand it, or that public, understanding well the options Jefferson put before it, has chosen servitude. Christopher Caldwell is a senior editor at The Weekly Standard and a columnist for The Financial Times. NEW YORK TIMES Homeowners Come Up Short on Insurance By JOSEPH B. TREASTER Published: August 31, 2004 EL CAJON, Calif. - Karla and Bruce Carroll remember the sheriff on his bullhorn ordering residents to evacuate and, minutes later, hearing the roar of monstrous flames arcing toward their modest home here in the hills above San Diego. Mrs. Carroll grabbed a family photo album as they ran to safety; Mr. Carroll started to gather his fishing rods. But she hustled him along. "Don't worry about those things,'' she recalls saying at the time. "We've got insurance." But, the Carrolls say, the insurance they bought from State Farm, the nation's largest property insurer, has left them at least $100,000 short of the cost of rebuilding their home. Today, nearly a year later, they are still wrangling with their insurer and living in a 29-foot-long house trailer on the land where their three-bedroom home once stood, overlooking a spectacular sweep of ridges and canyons. Their woeful shortfall in insurance coverage, experts say, is a plight shared unknowingly by millions of American homeowners. It has been fed largely by a shift in the way property insurance has been sold in recent years. In a move to cut costs from claims, insurance companies began in the late 1990's to phase out coverage that guaranteed the replacement of a destroyed home, regardless of the expense to the insurer. In place of that unlimited coverage, which had become nearly universal, insurers substituted a similar-sounding policy with a crucial difference: it pays only the amount stated on the policy plus, typically, an additional 20 percent to 25 percent. For their part, insurers insist that it is the consumer's responsibility to acquire adequate coverage. The old policy was called a guaranteed replacement policy. The new one, which most Americans now have, is called an extended replacement policy. "People look at this and it says 'replacement' and they think, 'That's good, I get my house replaced,' " said John Garamendi, the insurance commissioner in California. "But they don't get their house replaced. They get money up to the set limits plus the extended 20 percent or 25 percent." Marshall & Swift/Boeckh, a Los Angeles company that most insurers rely on for help in calculating the value of houses, estimates that 64 percent of American homes are underinsured by an average of 27 percent, with some homes underinsured by 60 percent or more. Another insurance industry company, AIR Worldwide in Boston, estimates that many upper-income homes in New England are underinsured by 30 percent to 40 percent. "The underinsurance problem lies just beneath the surface all across the country,'' said Robert P. Hartwig, the chief economist for the Insurance Information Institute, a trade group in New York. The insurance gap has been worsened by the nationwide housing boom that has been rapidly driving up the cost of lumber, bricks, cement and other construction materials, industry executives say. And in Southern California, rebuilding costs soared even higher as the demand for contractors and building supplies suddenly jumped after the Carrolls' home and several thousand others were destroyed in wildfires over a few days last October. But such explanations do not satisfy the industry's critics, who say insurers have shifted the burden of such mistakes onto homeowners. "Most people go to their insurance agent to buy coverage and figure they're fully covered," said J. Robert Hunter, the director for insurance at the Consumer Federation of America. "But often they're not." The issue of underinsurance has not attracted much attention because, of the millions of insurance claims every year, fewer than 2 percent are for the total loss of a house. But the wildfires here last fall came as a jolt. They quickly incinerated more than 3,700 homes and, Mr. Garamendi said, "a very large proportion" of them were underinsured. Consumer advocates and industry executives expect similar problems for the victims of Hurricane Charley in Florida as they begin working through their claims. "The problem is everywhere,'' Mr. Hartwig said. "The disasters simply expose it.'' George Kehrer, a lawyer and building contractor who founded Community Assisting Recovery in Los Angeles more than a decade ago to help people with insurance claims after disasters, said he had spoken to 1,200 people who lost homes in the California fires. "About a dozen of them,'' he said, "were adequately insured." No single factor is entirely to blame for the underinsurance, consumer advocates and industry executives say. Homeowners, they say, need to recognize their own responsibility. But under pressure to make sales, Mr. Garamendi and consumer advocates explain, insurance companies and their agents often aim low in valuing houses. The goal, they say, is to keep premiums down to keep customers from going to competitors, and sometimes even a few dollars can make a difference. "If they quote a realistic replacement cost, the price of the policy goes up," Mr. Garamendi said, "so they are motivated to keep the replacement cost down." Insurance industry executives argue that it would make no sense to undervalue homes intentionally. The higher the insurance coverage, the higher the premium, they point out. But Mr. Garamendi disagrees. "You want the sale first," he said. "O.K., you can get a little more premium if you give full coverage. But you lose the sale." Mr. Hunter, the consumer advocate, said agents often lacked the training to assess accurately the value of a home, usually done these days with the help of a computer program. Rarely do the agents leave their offices to assess a house personally, agents and industry executives said. Mr. Garamendi said some agents inadvertently undervalued homes by using a computer shortcut to obtain what is known as a "quick quote." Then, when a customer decides to buy coverage, the agent fails to add details like designer cabinets and fixtures that tend to increase the replacement estimate and the cost of the insurance. While most insurance policies include a built-in escalator to keep pace with general inflation, the costs of building supplies and paying for construction crews have been rising at a faster pace, in many cases widening the gap between the amount a house is insured for and what it will cost to rebuild it. Another factor in the insurance gap has been a failure by some homeowners to increase coverage after the spurt in home improvements, from new kitchens to extra bedrooms, as millions of Americans have used cheap money from mortgage refinancings in recent years to upgrade their homes. Still, in dozens of interviews over several days this month, owners of the homes in Southern California that were destroyed said repeatedly that they had been led to believe they had bought enough coverage to rebuild their homes and were stunned to find out they were wrong. Mrs. Carroll said she first bought her insurance from State Farm in 1998 shortly after she and her husband acquired their home for $172,500. "I told them I wanted full coverage for my house," she said. "I've lived in this area most of my life, and I knew there was a huge fire risk here. I had been evacuated for fires three times as a child." Two years later, she said, she checked back with the agent to make sure she had enough coverage and increased the coverage for possible additional costs as a result of changes in building codes. "I said, 'Are you sure this is enough to replace the house?' and she said, 'Oh, that's plenty of coverage,' " Mrs. Carroll recalled. "She had me convinced my house could burn or fall down in the canyon under heavy rains and, yeah, it's covered." At the time of the fire, the Carrolls' house was insured by State Farm for $126,000, which, following standard practice, did not reflect the value of the land. Their annual premium was $730. With 20 percent in extended replacement coverage and other standard features including a built-in adjustment for inflation and coverage on their two-car garage, fences and driveway as well as an additional 25 percent for anticipated building code changes - upgraded by Mrs. Carroll from the usual 10 percent - the Carrolls estimate their policy will pay them about $222,000. But Mrs. Carroll said a contractor hired by State Farm estimated that replacing their losses, not including their clothing and other personal things, would cost nearly $400,000. Bill Sirola, a spokesman for State Farm, said it was not clear whether the Carrolls were underinsured. "We are working with that family," Mr. Sirola said. "We are working with other builders on their behalf to get other estimates of their rebuilding costs." As the insurance companies see it, if people are underinsured it is primarily their own fault. "It's the homeowner's responsibility to see that his home is properly insured," said Mr. Hartwig of the Insurance Information Institute. Insurers say the terms of coverage are clearly spelled out in their policies. In California, insurers are also required to mail a statement annually specifying the terms of coverage along with renewal notices. But many homeowners burned out by last year's fires say they made clear they wanted to be able to replace their homes. In interviews, they said they had no way of knowing how much insurance they needed and relied on the agent to set the proper value and charge the appropriate price. Many say they would have been willing to pay more to assure themselves that their losses would be fully covered. "They're the experts," said Donald McCormick, a high school math teacher, who lost his home in the Scripps Ranch section of San Diego. "I don't go to the doctor and tell him how to do surgery." December 17, 2004 - NEW YORK TIMES - OP-ED COLUMNIST Buying Into Failure By PAUL KRUGMAN s the Bush administration tries to persuade America to convert Social Security into a giant 401(k), we can learn a lot from other countries that have already gone down that road. Information about other countries' experience with privatization isn't hard to find. For example, the Century Foundation, at www.tcf.org, provides a wide range of links. Yet, aside from giving the Cato Institute and other organizations promoting Social Security privatization the space to present upbeat tales from Chile, the U.S. news media have provided their readers and viewers with little information about international experience. In particular, the public hasn't been let in on two open secrets: Privatization dissipates a large fraction of workers' contributions on fees to investment companies. It leaves many retirees in poverty. Decades of conservative marketing have convinced Americans that government programs always create bloated bureaucracies, while the private sector is always lean and efficient. But when it comes to retirement security, the opposite is true. More than 99 percent of Social Security's revenues go toward benefits, and less than 1 percent for overhead. In Chile's system, management fees are around 20 times as high. And that's a typical number for privatized systems. These fees cut sharply into the returns individuals can expect on their accounts. In Britain, which has had a privatized system since the days of Margaret Thatcher, alarm over the large fees charged by some investment companies eventually led government regulators to impose a "charge cap." Even so, fees continue to take a large bite out of British retirement savings. A reasonable prediction for the real rate of return on personal accounts in the U.S. is 4 percent or less. If we introduce a system with British-level management fees, net returns to workers will be reduced by more than a quarter. Add in deep cuts in guaranteed benefits and a big increase in risk, and we're looking at a "reform" that hurts everyone except the investment industry. Advocates insist that a privatized U.S. system can keep expenses much lower. It's true that costs will be low if investments are restricted to low-overhead index funds - that is, if government officials, not individuals, make the investment decisions. But if that's how the system works, the suggestions that workers will have control over their own money - two years ago, Cato renamed its Project on Social Security Privatization by replacing "privatization" with "choice" - are false advertising. And if there are rules restricting workers to low-expense investments, investment industry lobbyists will try to get those rules overturned. For the record, I don't think giving financial corporations a huge windfall is the main motive for privatization; it's mostly an ideological thing. But that windfall is a major reason Wall Street wants privatization, and everyone else should be very suspicious. Then there's the issue of poverty among the elderly. Privatizers who laud the Chilean system never mention that it has yet to deliver on its promise to reduce government spending. More than 20 years after the system was created, the government is still pouring in money. Why? Because, as a Federal Reserve study puts it, the Chilean government must "provide subsidies for workers failing to accumulate enough capital to provide a minimum pension." In other words, privatization would have condemned many retirees to dire poverty, and the government stepped back in to save them. The same thing is happening in Britain. Its Pensions Commission warns that those who think Mrs. Thatcher's privatization solved the pension problem are living in a "fool's paradise." A lot of additional government spending will be required to avoid the return of widespread poverty among the elderly - a problem that Britain, like the U.S., thought it had solved. Britain's experience is directly relevant to the Bush administration's plans. If current hints are an indication, the final plan will probably claim to save money in the future by reducing guaranteed Social Security benefits. These savings will be an illusion: 20 years from now, an American version of Britain's commission will warn that big additional government spending is needed to avert a looming surge in poverty among retirees. So the Bush administration wants to scrap a retirement system that works, and can be made financially sound for generations to come with modest reforms. Instead, it wants to buy into failure, emulating systems that, when tried elsewhere, have neither saved money nor protected the elderly from poverty. THE NEW YORK TIMES January 14, 2005 Foreign-Profit Tax Break Is Outlined By EDMUND L. ANDREWS WASHINGTON, Jan. 13 - The Bush administration outlined rules on Thursday for a huge one-time tax break for companies that reinvest their overseas profits back into the United States. The tax break, which was part of last year's corporate tax bill, would allow companies to pay a fraction of the normal tax rate on hundreds of billions of dollars in foreign profits if they pledge to invest the funds in activities that may create jobs at home. In a setback for many of the biggest potential beneficiaries, the Treasury Department said companies could not use their windfalls for repurchases of stock or increases in shareholder dividends. Investors reacted with disappointment to the new rules. Stocks of companies that pushed hard for the tax break - Eli Lilly, Hewlett-Packard, Merck, Oracle and Pfizer - all declined slightly after the rules were announced. The rules would help companies finance some activities that do little to directly increase employment, and a few - like corporate acquisitions - that might lead to job cuts. The Treasury Department said that the tax break could be used to finance advertising and marketing, even if a company did not plan to increase its advertising. The administration said companies could also use their foreign profits to pay for corporate acquisitions, redeem old debt and spend on the general purpose of "financial stabilization." As adopted by Congress last year, the new law would give companies a one-time opportunity this year to bring a total of as much as $500 billion in foreign profits into the United States and pay a tax rate of 5.25 percent, instead of the standard corporate tax rate of 35 percent. Globe-spanning companies like Hewlett-Packard and Eli Lilly have for years deferred their United States taxes on foreign earnings. Under traditional tax law, the companies would be required to pay the full tax rate as soon as they brought the money back into the country. The one-time tax break would let companies take advantage of the lower rate if they put forward a plan to reinvest their profits in ways that enhance employment in the United States. The law itself was quite broad, explicitly allowing companies to allocate their money for "financial stabilization," corporate acquisitions and research and development. The Treasury Department, which opposed the provision during the debate in Congress, gave companies even more latitude. Under the "guidance" published by the Internal Revenue Service on Thursday, companies do not face a specific deadline for actually reinvesting the money and merely have to do so within "a reasonable time." Nor do companies have to invest more money on hiring or new equipment, or even advertising, than they did the year before. Companies would be able to apply the tax break to investments that they had already planned before their new "domestic reinvestment plan," and even to investments that they had already budgeted and planned to finance with other sources of money. "The Treasury Department and the I.R.S. do not intend to provide a template for a domestic reinvestment plan," the administration said in its set of guidelines, which totals 39 pages. Despite the unenthusiastic response from investors to the new rules, the tax break could provide a huge windfall to many technology and pharmaceutical companies that have earned billions of dollars in low-tax countries like Ireland. Oracle, the business-software company, has estimated that its tax break on foreign profits could be as much as $650 million. Oracle is hoping to use much of that money to shore up its balance sheet after buying PeopleSoft last year for $10.4 billion. Many American multinational corporations have deferred taxes on foreign profits. Hewlett-Packard, which wants to strengthen its balance sheet after buying Compaq, has more than $14 billion in untaxed foreign profits. Merck, the pharmaceutical giant, had $15 billion as of 2003. Johnson & Johnson had $12.3 billion. Wall Street analysts are divided about whether the tax break will actually achieve its intended purpose of attracting a rush of new investment in the United States. Anne Swope, a tax and foreign exchange analyst at J. P. Morgan, estimated that American companies had stockpiled more than $500 billion in overseas profits. "We feel confident that $300 billion of that will be repatriated," Ms. Swope said. "The changes in tax law in 1986 made it extremely difficult for companies to repatriate earnings. This is an opportunity to provide temporary relief." But Jan Hatzius, a senior economist at Goldman Sachs, predicted that the economic impact would be modest because companies have many ways to use their foreign profits without technically bringing them back into the country. "If companies want to access their foreign assets, it's easy to do," said Mr. Hatzius. "All they have to do is borrow against them."   NYT: February 9, 2005 Retirement Turns Into a Rest Stop as Benefits Dwindle By EDUARDO PORTER and MARY WILLIAMS WALSH LITTLETON, Colo. - For John A. Lemoine, retirement has been hard work. Forced to take an early pension package at AT&T three years ago, Mr. Lemoine, 54, a former building manager who once made more than $70,000 a year handling the operations of several AT&T sites, soon found that retirement was something he just could not afford. To supplement the greatly reduced pension he received upon his retirement, he first took an $11-an-hour job as a maintenance worker at the Sam's Club up the road from his home here. He retrained as an X-ray technician, and began earning $17.50 an hour as a part-time radiology technician for several clinics. Still unable to make ends meet, he also took a full-time job as a security guard for an hourly wage of $10.50. "I put in for other jobs, too," Mr. Lemoine said. "You'd be surprised who won't hire you because of your age." Employers had better get used to seeing older people's résumés. As numerous companies across the country withdraw retiree medical and dental benefits while others switch to less generous retirement plans, many aging workers who had expected to ease comfortably out of the labor force in their 50's and early 60's are discovering that they do not have the financial resources to support themselves in retirement. As a result, a lot more of them are returning to work. Since the mid-1990's, older people have become the fastest-growing portion of the work force. The Labor Department projects that workers over 55 will make up 19.1 percent of the labor force by 2012, up from 14.3 percent in 2002. Until recently, most economists said that older people were being lured back into the labor force largely because of opportunities growing out of the vibrant economy of the 1990's. But these days, they say, many such Americans are being drawn to work out of necessity rather than choice. As the nation gears up for a fundamental debate over the future of Social Security, these circumstances hint at potential changes in the federal program that supports more than 40 million elderly Americans. Just as companies are seeking ways to reduce their roles in financing former employees in retirement, many economists say that the Social Security program should also scale back in response to the aging of the population. Some have pointed out that continuing to raise the official retirement age in step with increases in Americans' average longevity could probably guarantee Social Security's solvency forever. "Policies promoting longer working life could ameliorate some of the potential demographic stresses," Alan Greenspan, the Federal Reserve chairman, told a conference of economists and policy makers in Jackson Hole, Wyo., last year. "Early initiatives to address the economic effects of baby-boom retirements could smooth the transition to a new balance between workers and retirees." To some extent, that transition is already under way - although not in the way Mr. Greenspan, 78 himself, proposed. As they stay longer in their jobs or peruse the help-wanted ads for post-retirement employment, Americans are reversing what had been a nearly century-long decline in the participation of older people in the work force. "Everyone that I talked to is looking at working part time," said Jim Drummond, 59, a 37-year veteran of US Airways in Pittsburgh who retired on Jan. 1 and whose pension plan recently failed and was taken over by the federal government. "The pension is not enough unless you are single and living alone." Gerald Fronek, 62, an electrician for Lucent Technologies in Lockport, Ill., now plans to retire in April, five years after his original plan was thwarted by the collapse of Lucent's stock in 2000, which took most of his lifetime savings with it. "I was dealt a bad card," Mr. Fronek said. "I just have to forget about that and move ahead." Necessity, Not Choice Made to carry more of the burden of their retirement, many retirees say they feel that a social compact between workers and employers - a set of expectations established over the second half of the 20th century - is being dismantled. Not only are many discovering that they cannot afford to retire, they are also finding themselves in a labor market in which companies facing tough competition seem intent on controlling costs, partly by ridding themselves of higher-earning older workers. "I spent 25 years with this company," Mr. Lemoine said. "When we were hired at Ma Bell there was this premise that the more dedication you gave the company, the more they would take care of you." The steepest turnaround in labor participation has occurred among older men. The percentage of men 55 to 64 years old in the work force fell steadily from 87 percent in 1950 to under 65 percent in 1994. Then it began inching back up, reaching 69 percent last year, according to the Labor Department. Among men 65 and older, the participation rate rose from 15 percent in 1994 to 19 percent last year. For older women, who entered the labor force at increasing rates through the 1950's and 1960's, the change has been less pronounced. Nevertheless, the rate of participation for women over 55, after declining from around 26 percent in the late 1960's to nearly 21 percent in the mid-1980's, has rebounded over the last two decades, to 31 percent. A big factor keeping people in the work force later is Social Security itself, which until recently provided relatively generous benefits for people retiring as early as 62 and discouraged work after 65. But in 1983, to deal with Social Security's first financial crisis, Washington approved a law to raise the normal retirement age from 65 to 67 and increase the benefit paid to people who kept working for additional years. That law only began to bite for those retiring after 2002. Many economists say that older Americans under 65, and therefore not yet eligible for Medicare, are being forced to accept work they might have disdained earlier so they can afford health insurance and pay for other necessities. "In the recessions through the 1980's and even in the early 1990's, the biggest drop in participation rates was among people in their 50's and 60's," said Gary Burtless, an economist at the Brookings Institution who studies retirement issues. But "that has not been true since 2000," he said. "My gut feeling is that what changed is the persistence and willingness of older workers to accept a job that would not have been to their liking 15 or 20 years ago." Joe Janson, for example, retired three years ago, when he was 55, from an $83,000-a-year engineering job at Lucent to a $35,000 pension. But now he is looking for work again to pay for his family's health insurance, which Lucent cut last year. And he is not setting his sights high. In January, he and his wife, Mary, made $140 in two days delivering phone books for Qwest. "If I have to," he said, "I will drive a school bus." Working Older and Longer Among the most vulnerable workers are those who made their careers at some of the titans of yore - companies like United Airlines, AT&T and Bethlehem Steel. In the labor-abundant baby boom era, large companies could offer generous benefit packages and valuable incentives for early retirement. Big unions like the Teamsters and the United Automobile Workers promoted early retirement, too, to clear the way for new hiring. Today, after rounds of downsizings, many companies have sharply cut their work forces to survive intensified competition from home and abroad, only to be left with large pools of retirees collecting benefits far longer than predicted. Lucent, for instance, has only 20,000 active workers in the United States to generate the business needed to help support nearly 120,000 retirees, whose health care last year cost about $775 million, an amount equal to 70 percent of Lucent's net profit. So the company has been aggressively paring the health insurance it offers its retirees, prompting older employees to rethink their retirement plans. "We simply cannot afford to absorb U.S. retiree health care costs at this level and remain a sustainable, competitive company," Lucent notified its management retirees last September in explaining a new round of health benefit cuts. As companies have whittled away at benefit packages, they have pushed their retirees back to work. The first step was the dismantling of many traditional pensions: the defined-benefit plans that offer a predetermined monthly income after retirement, and usually offer incentives for early retirees. Companies have been steadily replacing such plans with defined-contribution plans in which workers save a portion of their pay for retirement tax-deferred, and companies contribute a partial match. As recently as 1979, the Center for Retirement Research at Boston College found more than 80 percent of the workers covered by a company retirement plan had a defined-benefit pension. By 2001, the percentage had dropped to a little over 40 percent. The dismantling of traditional defined-benefit pensions left many older workers - who had accumulated pension credit under the old system - feeling short-changed. "They did us wrong," said Mr. Lemoine, who says that a realignment of AT&T's pension plan in 1996 slashed his benefits. He joined a retiree organization that is supporting a lawsuit against AT&T over the changes. According to Stephen Bruce, a lawyer for the plaintiffs, Mr. Lemoine's final pension - valued by the company at $135,000, which he took as a $70,500 lump sum plus $402 a month - was less than half of what he would have been due under the previous defined-benefit system. Citing the lawsuit, an AT&T spokesman said the company could not comment on the matter. Health Benefits Hold Sway Even more critical has been the collapse of company-paid health insurance for retirees, prodding growing numbers of workers to hang on to some job, almost any job, to keep their health coverage until Medicare kicks in at 65. In 1988, two-thirds of all large employers offered health benefits to retirees; last year only about one-third did. And employers who offer coverage are forcing workers to shoulder more of the cost. In 2004, 79 percent of them increased their retirees' premiums. A survey by Watson Wyatt, a corporate-benefits consulting firm, found that the absence of company-financed retiree health insurance increased the average retirement age by two years for women and 1.5 years for men. "In this day and age," said Jonathan Gruber, a professor of economics at the Massachusetts Institute of Technology, "retiree health insurance is perhaps the biggest single determinant of retirement." Mr. Janson, the former Lucent engineer, agrees with that. Even though he has two teenage daughters at home and his wife, Mary, does not work outside the home, he could afford to stay retired, he said, as long as Lucent kept paying for his family's health insurance. But last year Lucent stopped paying for his dependents' coverage. That left him with an extra monthly bill of about $500. "We were making it before they took medical away," Mr. Janson said. "It's kind of like the company pulling the rug out from under me now." Mr. Janson is also suffering because he put most of his retirement savings into Lucent stock. Shares he bought at $80 are now trading at less than $4 and his nest egg - worth about $700,000 in 1999, he said - is now less than $150,000. For Americans heading into retirement, the contrast to the previous generation is stark. The typical household headed by a 47- to 64-year-old is poorer today, in constant dollars, than a similar household was in 1983. The main reason is the disappearance of the traditional pension, according to Edward N. Wolff, a New York University economist who analyzed Federal Reserve wealth data. Mr. Lemoine is lucky that AT&T still offers health insurance that covers his family, even though the monthly premium of $421.52 is more than his pension check. A head injury in a car accident in August ended his stints as a security guard and part-time X-ray technician. That shifted the financial burden of a four-teenager household onto his wife, Susan, 41, who draws a modest salary as a paralegal. Mr. Lemoine's 80-year-old mother also pitches in, lending the family money. The ordeal has profoundly changed Susan Lemoine's outlook on the future. "I will work," she said, "until the day I die." Eduardo Porter reported from Littleton, Colo., for this article, and Mary Williams Walsh from New York. Back to top